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Subject 1. Short-Term Funding Alternatives PDF Download

Both non-financial corporations and financial institutions rely on borrowed capital to support their short-term activities.

External Loan Financing

The short-term funding alternatives from bank sources:

  • Uncommitted lines of credit: this is the weakest form of bank borrowing since it involves no formal commitment from the bank;

  • Committed (Regular) lines of credit: A bank provides a letter of credit, for a fee, guaranteeing the investor that the company's obligation will be paid. It is frequently used to guarantee payment of an obligation.

  • 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).

  • Secured (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."

External, Security-Based Financing

Commercial papers are short-term, unsecured promissory notes, generally issued by large corporations (unsecured corporate IOUs). They are cheaper than short-term business loans from commercial banks.

Many issuers roll over their paper on a regular basis. Issuers are required to secure backup lines of credit to minimize rollover risk.

Short-Term Funding Alternatives for Financial Institutions

Banks have different short-term funding sources. These include:

  • Retail deposits: checking accounts, savings accounts, money market accounts, etc.

    • Central bank funds: funds available from the central bank, or from other banks in the central bank funds market.
  • Interbank funds: the market of loans and deposits between banks.
  • Large denomination negotiable certificates of deposit: non-negotiable or negotiable CDs, large-denomination CDs or small denomination CDs.

Most commercial papers are issued by financial institutions. It is a short-term, unsecured promissory note that is used by financial institutions as a source of short-term and bridge financing.

User Contributed Comments 1

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garson Rollover risk is a risk associated with the refinancing of debt.
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Martin Rockenfeldt

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