There are different types of financing methods for companies to consider. Considerations include their costs, risks, market conditions, regulatory requirements etc.

Internal Financing

operating cash flows = net income + depreciation - dividend payments.

Two countering forces should be considered when managing accounts payable:

• Paying too early is costly unless the company can take advantage of discounts.
• Postponing payment beyond the end of the net (credit) period is known as "stretching accounts payable" or "leaning on the trade." Trade discounts should be evaluated carefully.

Accounts receivable is just the opposite of accounts payable. The most popular measures to evaluate receivables are receivable turnover and number of days of receivables.

Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers, etc. The goal of inventory management is to identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. Just-In-Time (JIT) is an inventory strategy implemented to improve a business's return on investment by reducing in-process inventory and its associated costs.

Cash does not pay interest. Companies should invest funds that are not needed in daily transactions, in marketable securities that can be sold quickly if they need cash.

Financial Intermediaries

Banks and non-bank lenders can offer the following means of financing.

Line of credit (L/C):

• A bank provides a letter of credit, for a fee, guaranteeing the investor that the company's obligation will be paid. It is a promise from a bank for payment in the event that certain conditions are met.
• It is frequently used to guarantee payment of an obligation.
• Committed lines of credit are stronger than those that are uncommitted because of the bank's formal commitment.

Revolving credit agreement: A formal, legal commitment to extend credit up to some maximum amount over a stated period of time (e.g. three to fix years).

Asset-based loans are forms of debt for money borrowed in which specific assets have been pledged to guarantee payment. In assignment of accounts receivable, the borrower pays interest, a service charge on the loan, and the assigned receivables serve as collateral. Factoring is the selling of receivables to a financial institution, the factor, usually "without recourse."

Capital Markets

Commercial paper:

• Short-term, unsecured promissory notes, generally issued by large corporations (unsecured corporate IOUs).
• Cheaper than a short-term business loan from a commercial bank.
• Dealers often require a line of credit to ensure that the commercial paper is paid off.

A firm can finance its operations from three main sources of capital:

• equity or common stock
• preferred stock
• debt

Please examine the exhibit 2 in the textbook for detailed comparisons between debt and equity financing.

A key point to note is interest on debt is tax deductible; therefore, to calculate the cost of debt, the tax benefit is deducted. There is no tax savings associated with the use of preferred stock or common stock.

Other Financing

A lease in its most basic form is the renting of some sort of property. Using leases, a firm can avoid tying up too much capital in fixed asset investment.

Considerations Affecting Financing Choices

Firm-specific financing considerations include company size, riskiness of assets, assets for collateral, public vs. private equity, asset liability management, debt maturity structure, currency risks and agency costs.

General economic considerations include taxation, inflation, government policy and monetary policy.