 Hey guys, it's MJ the students act tree and in this video. We're gonna be looking at short-term company finance So this is still with subject CT to chapter 2 and I have I've got some slides But they just text base so feel free to use this as an audio only Video so that further to do let's jump into the material I want to be talking about five various short-term Things that you can use to get finance for your company. They are bank overdraft trade credit Factoring bills of exchange and commercial paper Now let's start off with bank overdrafts. I think this is the one most people would be familiar with The idea here is that normally with a bank you go in and you put money in and That earns interest and whenever you need it you take that money out Now there can be situations specifically with businesses starting up and all this type of stuff where they have a lot of negative cash flows in the beginning and only so again the positive cash flows at the end and sometimes due to bad budgeting or Disasters or just ad hoc expenses companies find that they Don't have enough money and this is where the bank steps in and they say listen here guys We know you're gonna make money in the future. We're gonna provide you with your liquidity You can Overdraw the amount of money in your bank account however by doing so You do get quite a high interest rate is applied you do have to organize with the bank and It does very much depend on the relationship as the bank can recall that money at any time So you are a little bit at their mercy and this was very important to have a good relationship with your bank manager Also, they might limit the amount you can overdraft And they might limit the time period Next let's talk about trade credit now trade credit is quite interesting. This is where let's say I'm gonna buy something from Another company, you know as part of my supply chain Let's say I'm making shoes and I need to buy a whole bunch of leather in order to make my shoes Then what I can organize with the the company that's selling me the leather I can agree to get the leather now and only pay them in say 90 days time and This is good for me in the sense that you know for those 90 days Whatever money I could have spent on that can build up a little bit of interest But also this is a way to you know to help your cash flows and because you want to push the negative cash flows as far into the future as possible So that they're close or even after the positive cash flows So that you don't have a liquidity problem Although as you can imagine a lot of businesses Can default on these trade credits So I get the leather I make the shoes nobody buys the shoes I don't have enough money to pay back my leather supplier Which means the next time I come to my leather, they're not gonna offer me the trade credits again and Again, we're seeing how important relationships are with business because the better your relationship with them The longer you can get your trade credit period for and That's a big benefit for you And in most cases no explicit interest is charged and I mean it's becoming so common in industry That some businesses offer discounts if you pay in cash instead Now we're going to go on to something called factoring factoring is something I mean, I remember I was not very familiar with it Although we did cover it a little bit in school accounting And factoring is when let's say people come to my shop and they buy their shoes on credit Which means they buy the shoes today, but they're only going to pay me at the end of the month Um, this is not good for me in the sense that My positive cash flow is now being pushed into the future Although i'm prepared to do it In order to sell more shoes and you know, it's good for for customer service and customer satisfaction But now let's say I need that money Straight away what I can do is I can approach a third party and engage in factoring, which means I give up the rights to that credit sale in exchange for cash flow now And the reason why another company would do it is because I'd offer them a bit of a discount So if you it's it's normally used if you really need the cash flow and um, you know, you have a little bit of a liquidity problem You can Off off load it to a third party now. There's various types of factoring. There's non-recourse factoring and there's recourse factoring um, recourse factoring only provides early payments of invoices And non-recourse factoring is where the supplier sells on its trade debt To a factor in order to obtain cash payments of the accounts before their actual due dates So what this means is that factor then takes over all the responsibility for credit analysis of new accounts payment collections and credit loss But like I said factoring I guess if you you're in the business and you're trading you're a trader and all that stuff You'll be more familiar with factoring than I am um, let's talk about bills of exchange Okay bills of exchange. These are these are interesting things. I mean the definition of a bills of exchange um It is effectively a claim to the amount owned by a purchaser of goods on credit and it may be accepted by a bank This means that the bank guarantees payment against the bill to him ever holds the bill at maturity The bill can then be be sold to raise short-term finances Now when you think of So these bills of exchange they kind of have they've got two names on them They've got the company and they've got this investment bank who kind of Guarantees it so your bills of exchange are known as two name paper Because they carry the name of the company which owes the money and of the accepting bank And when that endorser is an eligible bank The bill is known as an eligible bill of exchange And that means it can be sold to the bank of England Although, you know, South Africa I wonder how The rules and regulations work with regards to that Like again, it's not saying that I've come across often of bills of exchanges there's also um So that's got two Two names on it. There's another one that just has one name on it. And that is a commercial paper And commercial paper is a single name form of short-term borrowing used by large companies It comes in the form of a bearer document for large denominations Which are issued at a discount and redeemed at par And the nice thing about a bearer document is whoever holds that piece of paper Can then exchange it for money So in a way, it's almost it's almost like the business or all these large businesses are printing Money in the sense that they're printing paper that have a value on that can be traded and it can be collected or exchanged for You know, real currency at a certain date But and companies are their companies can do this in order to to raise a whole bunch of short-term finance I mean these are I mean the time periods for them are quite short. I mean they can range anything from one week to to one year And they normally quite big denominations, you know, like five million rand A pop or or something like that So that is commercial paper Again, it's not something Small business owners would be dealing with it's more of a short-term finance for a large corporation So remember that in the exam if it's Always look at what company you're dealing with if they're saying how can this company raise finance If they are a small or medium term company Then commercial paper is not likely to be a viable option But still mention it and you'll get marked for saying that commercial paper is not viable for them But anyway, that's all we have time for on Short-term finances Thanks so much for listening and i'm going to be making a video on tax That's going to be a lot of fun tax is quite a quite a boring topic So I will try and spice it up a bit And i'm also going to be launching a video on artificial intelligence. So make sure you Check that one out. It's going to be it's going to be quite a fun video that one But yeah, thanks guys for listening and i'll see you next time. Cheers