The present work focuses on instruments of short- and medium term financing. Financing is very important for companies in all countries of the world, but what is financing exactly? Why do companies need corporate finance?
The nature and extent of the procured, abstract capital are shown on the liabilities side of the balance sheet in the items of equity and debt. On the asset side of the balance sheet it can be seen what kind of goods were procured with the funds provided by the capital providers (investment). As an example, if someone wants to start a business for the production of tennis balls, this person has to procure capital to purchase the raw materials for the production of tennis balls and to pay the staff for manufacturing. Hence the necessity to make use of financial instruments arises. A classification of financing instruments can be carried out according to various criteria. With regard to the origin of capital, external and internal financing can be distinguished. Based on the different types of capital, instruments of financing can be assigned either to equity or debt financing. Moreover, methods of funding can be classified by the purpose and the occasion of capital procurement, or by the maturity structure.
When financing is subdivided in external and internal funding on the basis of the origin of the capital, a clear separation between the company on the one hand and the capital donors (including the owners or shareholders) on the other hand is required.
Table of Contents
1 Introduction
2 Basics – Classification of Financing Instruments
2.1 Origen of the Capital
2.2 Legal Status of the Investor and Ownership
2.3 Duration of Provision of the Capital
3 Short- and medium – Term Instruments
3.1 Trade Credits
3.2 Bank Loans as Cash Credits
3.3 Bank loans as credit commitments
3.4 International Bank Loans
4 Summary
Objectives and Topics
This work explores the essential instruments of short- and medium-term corporate financing, examining how businesses procure capital to meet operational requirements and growth objectives. It investigates various financing models, ranging from traditional trade and bank credits to more specialized instruments like mezzanine capital and medium-term notes.
- Theoretical classification of financing instruments based on origin, legal status, and duration.
- Detailed analysis of trade credits, including supplier and customer loans.
- Evaluation of bank-based cash credits, such as overdraft facilities and Lombard credits.
- Examination of credit commitments, including acceptance credits and guarantee facilities.
- Overview of international financing options and corporate notes.
Excerpt from the Book
3.2 Bank Loans as Cash Credits
Overdraft Facility The overdraft facility is a credit on current account, which is granted in foreign currency at a specific amount (account overdraft limit). Depending on requirements, it can be made use of up to the agreed limit. The overdraft facility is provided by credit institutions as money lending. In case of money lending, the borrower receives means of payment in the form of cash or book money. Virtually every business has an overdraft facility at its disposal.
The overdraft facility is commonly used to cover short-term fluctuations in the capital requirement of a business. Generic forms of overdraft facilities are operating loans, seasonal credits and bridging loans/ intermediate credits. Operating loans enable companies to bankroll wage and salary payments, use of discounts and acquisition of raw, auxiliary and working materials. Seasonal credits are taken to finance transitory peaks in employment. Bridging loans serve to pre-finance issue of securities and, for instance, construction projects.
The following advantages of overdraft facilities dominate: They are very flexible in use. Purpose and amount of the loan can be determined by the borrower. Consequently the borrower has to expect high credit costs.
Chapter Summary
1 Introduction: Provides an overview of the importance of corporate financing and the necessity of using financial instruments for business operations.
2 Basics – Classification of Financing Instruments: Defines the criteria for classifying financing, including the origin of capital, legal status of investors, and capital duration.
3 Short- and medium – Term Instruments: Discusses practical tools for corporate funding, including trade credits, various bank loan structures, and international notes.
4 Summary: Evaluates the practical application and cost-effectiveness of these instruments for small and medium-sized enterprises based on industry surveys.
Keywords
Corporate Finance, Short-term Financing, Medium-term Financing, Equity Capital, Debt Financing, Trade Credits, Overdraft Facility, Lombard Credit, Discount Credit, Acceptance Credit, Guarantee Facility, Medium Term Note, Euro Note, Capital Procurement, Corporate Liquidity
Frequently Asked Questions
What is the core focus of this publication?
The work focuses on the categorization and practical application of various financial instruments used by companies for short- and medium-term funding.
Which thematic fields are addressed?
The main themes include capital classification, trade credit management, bank-based lending, credit commitments, and international financing structures.
What is the primary research goal?
The goal is to provide a clear understanding of how different financial instruments function and how they can be used to meet the capital requirements of a business.
What methodology is applied?
The publication uses a descriptive and analytical approach, synthesizing existing literature, legal frameworks, and empirical survey results regarding financing practices.
What does the main part cover?
The main part covers detailed explanations of trade credits, overdraft facilities, Lombard credits, acceptance credits, and international Medium Term Notes.
Which keywords define this work?
Key terms include corporate finance, equity, debt, overdraft facilities, trade credits, and financial instrument classification.
How is the "Lombard Credit" distinct from an "Overdraft Facility"?
Unlike the overdraft facility, a Lombard credit is provided against the pledge of specific movable assets and is typically granted and repaid at fixed dates.
Why are "Guarantee Facilities" important for companies?
Guarantee facilities allow companies to leverage their creditworthiness to hedge major contracts without requiring the immediate provision of liquid funds by the bank.
What is the significance of the "Euro Note" in the Eurozone?
The Euro Note is a specific form of medium-term note used frequently in European markets, often characterized by maturities of five years or less.
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- Lola Reiter (Autor), 2015, Instruments of Short- and Medium Term Financing, Múnich, GRIN Verlag, https://www.grin.com/document/459448
