Forms of Short-term Financing

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Unit 7.1-Forms of Short-term Financing 

Introduction | Preparing to Borrow | Vendor Financing | Documentary Collections | Bank Check | Personal Resources | Bank Financing | Export Credit Insurance | Guarantees | Ex-Im Bank Financing | SBA | Equity Investment | Earnings Requirments | Working Capital | Collateral | Resource Management | Primary Differences | Factoring | Forfaiting | Summary | Resources | Activities | Assessment

Unit 7.1- Forms of Short-term Financing

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Short-term financing opportunities are available in a variety of ways to firms in global business. The majority of short-term transactions covered by financing are for periods of 180 days or less. Short-term financing requirements result from the need to increase inventory. Inventory is then converted to sales which, if extended payment terms are given, create accounts receivable. Inventory and accounts receivable are short-term in nature and provide a collateral base for a lender to provide financing. A company may need financing when the inventory and accounts receivable grow at a fast pace as a result of continually increasing sales. Then there is a greater need for funds to support the increase in the accounts that are growing at a faster rate than the accounts receivables can be converted to cash. The key factors in determining eligibility for short-term financing are whether the product is to be re-sold or used by the buyer. Financing is limited by the product's useful life and whether or not it is considered capital equipment or inventory. Capital equipment can usually be financed for periods greater than one year, whereas most manufactured goods and agricultural products cannot. There are always exceptions to this rule; for example, many governments promote the export of agricultural products by offering guarantees on medium-term financing. In the US, such guarantees are offered by the Commodity Credit Corporation.

Unit Objective

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The goal of this material is to introduce you to the forms of short- term financing available to support international business transactions. This lesson includes an introduction to the various costs and risks of each form of financing. By the end of this unit you will be able to

  • identify short-term (180 days or less) financing opportunities (government and private).
  • identify how credit insurance is used as a form of short-term financing.
  • identify the difference between loans and guarantees.

Unit Outline

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Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/07/01: Knowledge of forms and functions of short-term financing (e.g., credit insurance, government supported finance, discounting, time draft letter of credit, Exporting Working Capital Program.