CIMA F3 Syllabus B. Sources of long term funds - Short term finance - Notes ^{1 / 15}

- in the exam always remember to think about these when asked about possible ways of raising finance

Overdraft
This is the riskiest type of finance as the bank can call it in at any time.
The bank has the right to be repaid overdrawn balances on demand, except where the overdraft terms require a period of notice.
The bank can use the customers’ money in any legally or morally acceptable way that it chooses
Short term Loan
Less risky than an overdraft but it will possibly need replacing and there’s a risk that it would be on worse terms - if the economy changes
Trade payables
Often seen as free finance - although you may actually be missing out on early settlement discounts.
Be careful also not to annoy your creditors by taking too long to pay
Debt Factoring
The sale of a business' invoices to a third party.
The business selling will pay a fee for this service
The third party is charged with processing the invoices, and the business lending the invoices is able to receive loans based on the expected payments on the invoices.
Short -Term Leases

Protection against obsolescence
Since it can be cancelled at short notice without financial penalty.
The lessor will replace the leased asset with a more up-to-date model in exchange for continuing leasing business.
This flexibility is seen as valuable in the current era of rapid technological change, and can also extend to contract terms and servicing cover
Less commitment than a loan
There is no need to arrange a loan in order to acquire an asset and so the commitment to interest payments can be avoided, existing assets need not be tied up as security and negative effects on return on capital employed can be avoided
Operating leasing can therefore be attractive to small companies or to companies who may find it difficult to raise debt.
Cheaper than a loan
By taking advantage of bulk buying, tax benefits etc the lessor can pass on some of these to the lessee in the form of lower lease rentals, making operating leasing a more attractive proposition that borrowing.
Off balance sheet finance
Operating leases also have the attraction of being off-balance sheet financing, in that the finance used to acquire use of the leased asset does not appear in the balance sheet.

to provide a link between investors who have surplus cash and borrowers who have financing needs.
to aggregate invested funds in order to meet the needs of borrowers.
to offer maturity transformation, in that investors can deposit funds for a long period of time while borrowers may require funds on a short-term basis only