Fundamentals of Financial Management, Third Edition

SUMMARY

Short-term financing is either spontaneous or negotiated. Trade credit emerging out of credit purchases is the most significant form of spontaneous source of funds. Trade credit is either in the form of an open transaction or it carries an instrument effecting it. This form of financing does have benefits, but, at the same time, it involves certain implicit and explicit costs. Payments can be stretched only to an extent where the cost of stretching does not exceed the benefits from it.

Among the sources of negotiated financing, banks are the most important source. Bank credit is either unsecured or against collateral. There are different modes of collateral, such as hypothecation, pledge, mortgage and lien. Bank credit takes the form ...