Free Online Course in International BusinessKnowledge StatementKnowledge of Forms of Short-term Financing: Credit Insurance, Government-supported Finance, DiscountingGoalThe 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.Learning ObjectivesYou 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. IntroductionShort-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 products 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.Preparing to Borrow Needed FundsFinancial statements must be available for internal and external purposes. The financial statements represent the company and tell the story of its history to others. Companies with good financial statements have a better chance of getting credit from all available sources. The better the financial statements are, the lower the credit risk is, creating more favorable financing options for a buyer. To qualify for any financing option, a buyer will need to meet the requirements of the funding provider. The company's financial plan determines what options will be available. Thus understanding and properly preparing a good financial plan is primary. It is not essential to understand a balance sheet in its entirety, but it does help to have an understanding of the relationships between some of the items listed on the balance sheet and income statement since lenders look very carefully at these relationships. The key matter is the relationship of the accounts receivable to sales and the transition to cash:• Accounts receivable are a desirable asset. Banks and factors scrutinize these because accounts receivable provide collateral for the basis of a loan. • Sales are the outcome of extending payment terms which then create accounts receivable. • Inventory is decreased, and cost of sales is increased. • Cash is generated when a buyer pays the obligation (accounts receivable). • Sales are the primary goal, and profits are the desired end results. The end result of the difference between sales and cost of sales is loss/ profit that flows into the company (debit if loss, credit if profit). Vendor Financing - Payment TermsOpen AccountVendors are the suppliers of raw materials that are used in the production of inventory. It is in the best interest of these vendors to sell as much of their product as possible but only to a qualified buyer. Credit terms provided to a buyer are a key financing option. Most companies do not understand how important it is to have these credit terms available. The vendor or supplier of these materials or manufactured goods is actually financing the company, eliminating the need to go to another financing source to provide funds to purchase these goods. The company that meets its obligations is more likely to be able to obtain additional credit and favorable terms in the future. It is also much easier for a startup company to build a relationship with favorable terms with a supplier or vendor over any other funding source. Each will have specific qualifying criteria, but often a minimum credit facility will be provided to a buyer with a decent balance sheet.
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