This paper should give the reader an understanding of what funding is in general and what types of short- and medium-term financing are common. In the first part of the paper, the general meaning of funding is highlighted. In the further course, the different forms of financing are briefly presented. The main part of the thesis deals with the short- and medium-term financing period and the associated financing instruments. In order to complete the paper, the author will give a personal conclusion in a last point.
In today's fast-paced world, market conditions for companies are becoming more complex day by day. Companies are under constant pressure to maximize sales and profits, cut costs and sustainably increase the value of the business.1 Due to these factors, the financial management of a company becomes more and more important. Above all, the development of capital demand and the associated procurement of necessary funds often present companies with major challenges.2 In order to ensure the solvency of a company, the financial industry offers basic financing instruments. Correct use of these financing instruments can significantly benefit companies.
Table of Contents
1. Introduction
2. What is meant by “finance”?
3. Forms of financing
3.1 External financing vs. internal financing
3.2 Equity financing vs. debt financing
3.3 Permanent financing vs. temporary financing
4. Credit period
4.1 Short- and medium-term financing
4.2 Instruments of short- and medium-term financing
4.2.1 Commercial loans
4.2.2 Bank loans
5. Conclusion
Objectives & Topics
The primary objective of this thesis is to provide a fundamental understanding of financing, with a specific focus on common short- and medium-term instruments used by companies to maintain solvency and fund operational requirements.
- Principles of financial management and capital procurement
- Distinction between various financing forms (internal vs. external, equity vs. debt)
- Analysis of short- and medium-term financing periods
- Detailed examination of commercial and bank loan instruments
Excerpt from the Book
4.2.1 Commercial loans
Customer prepayments are prepayments made by the client for the purchase of products or services. The customer already makes payments before the delivery or service takes place.28 Down payments are widespread in certain sectors, such as plant construction, shipbuilding or residential construction, since such large-scale projects require a large amount of capital.29
Customer prepayments are either paid when the contract is concluded or when the order is placed and thus before delivery or after partial completion. They improve the liquidity situation of the supplier and are available to him "without interest". In addition, the supplier has the great advantage that customer payments reduce the customer's risk for him as he has been granted the purchase of the goods or services.30
The opposite of the customer payment represents the supplier credit.31 This loan is used very frequently in practice and is an important financing instrument especially for the business sector.32 In the case of a supplier credit, the supplier (lender) gives the buyer a term of payment. This results in a delay of the payment in relation to the received service. The supplier credit serves as a means of sales promotion.33 If the claims are settled immediately, the customer is often granted a cash discount.34 A common contract rule is: "For payment within 10 days 2% discount, up to 30 days payment net cash". The customer receives a discount of 2% on the invoice amount if he pays within 10 days. If he waits for more than 10 days, the full invoice amount is due.35
Summary of Chapters
1. Introduction: Describes the increasing complexity of market conditions and the resulting necessity for effective financial management to ensure company solvency.
2. What is meant by “finance”?: Defines financing as a core part of the financial industry, highlighting the procurement of resources and distinguishing it from capital appropriation (investment).
3. Forms of financing: Explains the classification of financing based on origin (external vs. internal), legal status of investors (equity vs. debt), and duration (permanent vs. temporary).
4. Credit period: Focuses on the practical application of short- and medium-term loans, detailing specific instruments like customer prepayments, supplier credits, bank loans, Lombard loans, and acceptance credits.
5. Conclusion: Summarizes the essential role of capital for business survival and emphasizes the importance of selecting the correct financing instruments while acknowledging associated costs and risks.
Keywords
Financing, Capital Procurement, Short-term financing, Medium-term financing, Internal financing, External financing, Equity financing, Debt financing, Commercial loans, Supplier credit, Bank loans, Lombard loan, Acceptance credit, Liquidity, Financial management
Frequently Asked Questions
What is the primary purpose of this research paper?
The paper provides a comprehensive overview of financial instruments, explaining what funding entails and identifying common short- and medium-term financing methods available to businesses.
Which central topics are discussed in the thesis?
The work covers the definitions of finance, the different forms of financing (such as internal vs. external), the distinction between equity and debt, and specific loan instruments for operations.
What is the core research question or objective?
The objective is to equip the reader with an understanding of general funding and the specific mechanisms of short- to medium-term capital procurement.
Which methodology is employed in this work?
The author utilizes a literature-based analysis, drawing on various financial textbooks and academic sources to categorize and explain financing instruments.
What content is covered in the main section?
The main part deals with the duration of financing and examines practical instruments including customer prepayments, supplier credits, current account overdrafts, Lombard loans, and guarantee loans.
Which key terms define the scope of the work?
The scope is defined by terms such as capital procurement, liquidity management, credit periods, and the specific instruments used to balance financial fluctuations.
How do commercial loans contribute to a company's liquidity?
Commercial loans, such as customer prepayments, provide the supplier with interest-free capital before services are rendered, while supplier credits help the buyer manage short-term payment delays.
What distinguishes a Lombard loan from a standard bank loan?
A Lombard loan requires the borrower to deposit specific collateral—such as securities or goods—with the lender, serving as a pledge for the granted loan.
When would a company typically choose an acceptance credit?
Companies often use acceptance credits for foreign trade transactions, leveraging the bank's creditworthiness to guarantee payments to international business partners.
Why is the distinction between internal and external financing important?
It is crucial because internal financing relies on operational revenue generated within the company, whereas external financing requires convincing external lenders of the firm's repayment capability.
- Citar trabajo
- Francesca Müller (Autor), 2018, Instruments of short- and medium-term financing, Múnich, GRIN Verlag, https://www.grin.com/document/900194
