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Unsecured and Secured Short Term Sources

Unsecured and Secured Short Term Sources

Unsecured Non-Bank Short Term Sources

Commercial Paper:

Short-term, unsecured promissory notes, generally issued by large corporations, with maturities of a few days to 270 days. Usually issued in multiples of $100,000 or more. Commercial paper market is composed of the (1) dealer and (2) direct-placement markets.

Advantage: 

  • Cheaper than a short-term business loan from a commercial bank.
  • Dealers require a line of credit to ensure that the commercial paper is paid off.

Private Loans:

A short term unsecured loan may be taken from a wealthy shareholder, a major supplier, or other parties interested in assisting the firm through a short term difficulty.

Cash Advances for Customers:

A customer may pay for all or a portion of future purchases before receiving the goods. This aids the firm to purchase raw materials and produce the final goods.

This form of financing is a special arrangement for expensive or custom-made items that would strain the financial resources of the manufacturing company.

Unsecured and Secured Short Term Sources

sources of short term finance

Secured Short-term Sources:

Security (collateral) — Asset (s) is pledged by a borrower to ensure repayment of a loan.  If the borrower defaults, the lender may sell the security to pay off the loan.

Collateral value depends on:

  • Marketability
  • Life
  • Riskiness

Types of Inventory Backed Loans:

Field Warehouse Receipt — A receipt for goods segregated and stored on the borrower’s premises (but under the control of an independent warehousing company) that a lender holds as collateral for a loan.

Terminal Warehouse Receipt — A receipt for the deposit of goods in a public warehouse that a lender holds as collateral for a loan.

Trust Receipt – This loan is secured by specific and easily identified collateral that remains in the control or physical possession of the borrower. A security device acknowledging that the borrower holds specifically identified inventory and proceeds from its sale in trust for the lender.

Example: When automobile dealers use this kind of financing for the cars in their showrooms or in stock, it is called floor planning.

As implied by the name, this kind of loan requires a considerable degree of trust in the honesty and integrity of the borrower. Once the inventory is sold or the receivable is collected, payment must be remitted to the lender. If there is a default, the loan is said to be secured by bogus collateral.

These loans are common when the collateral is easily identified by description or serial number and then each item of collateral has relatively large dollar value.

Floating Lien — A general, or blanket, lien against a group of assets, such as inventory or receivables, without the assets being specifically identified

Chattel Mortgage — A lien on specifically identified personal property (assets other than real estate) backing a loan.

Related Posts:

  1. MEANING AND DEFINITION OF FINANCE

  2. INTERNATIONAL TRADE AND FINANCE

  3. STARTUP COST FOR SME’S

Financial Institutions:

Primary sources of secured short term financing are banks and financial institutions, including insurance companies, finance companies, and the financial subsidiaries of major corporations.

The best mix of short-term financing depends on:

  • Cost of the financing method
  • Availability of funds
  • Timing
  • Flexibility
  • Degree to which the assets are encumbered

It is always better to go for bank loans or loans from established and long standing private institutions because there is a leverage for the debtors to sit for discussions to sort out issued in case of defaults.

All banks in India are trying to close accounts labeled under NPA- Non Performing assets either by recovering the money through one time settlement  (OTS) or by auctioning the collaterals pledged during the time of loan sanctioning.

If you happen to take loans from individuals or third-parties, you cannot enjoy this comfort or breather.

Some Finance Quotes and Sayings for You:

  • A Bank is a Place That Will Lend You Money

             if you can prove that you don’t need it.

  • Debt is a product that has been sold to us with such repetition and intensity

             that most people believe they can’t live without it.

  • Rule No 1: Never Lose Money

             Rule No 2: Never Forget Rule Number 1.

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