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Financing Short/Medium Term Cash Deficits

In cash and liquidity management the primary objective is always to minimise the cash deficits that need financing. And when there are cash deficits, to minimise the overall cost of the financing without placing unmanageable constraints on the company's liquidity or flexibility, and without providing excessive security or collateral to the lender.

To minimise the overall cost of borrowing the corporate treasurer first needs to estimate the cash deficits by amount location, duration and currency using comprehensive information on the company's cash balances and forecast cash requirements. All financing decisions need be based on the possible sources of finance, their current and forecast costs, associated terms and security requirements, and their tax and accounting treatment.

Internal Financing
The first source of funding of cash deficits should always be internal financing using traditional techniques, such as releasing working capital by extending payment terms and releasing trapped cash in restricted currencies. Today credit is so limited that making inter-company loans within business groups via the in-house bank is very attractive, even with the added tax implications.

External Financing
External short-term financing options include:

  • Bank Overdraft facilities - the most flexible borrowing technique which gives companies immediate access to funds within specified limits and at a predefined spread over interbank rates. Overdrafts are mainly used to cover day-to-day gaps in companies funding. But overdrafts are typically repayable on demand and so cannot be taken as a committed source of liquidity.
  • Short-Term Loans for a defined period - includes fixed rate bank loans or advance facilities. Their main advantage is that these loans cannot be withdrawn immediately, but can have complex documentation so there can be considerable break up costs if repaid early. (For more details see Loan Finance.)
  • Revolving Credit Facilities - offer some of the benefits of an overdraft and a term loan. RCFs are mostly established for 3-5 years and allow companies to borrow up to a defined amount provided all relevant documentation and warranties are complied with. Normally the RCF can be repaid early with minimal break costs
  • Money Market borrowing - some large companies will be able to use money market lines with their relationship banks to borrow for a few days up to a month via the money market
  • Commercial Paper financing - CP or bonds are issued by companies at a discount to their face value.
  • Invoice Factoring/Invoice Discounting - the sale of receivables to a third can improve cash flow by generating cash today in lieu of future sales receipts. (For more details see Factoring/ Invoice Discounting / Dynamic Discounting.)
  • Trade Finance - a wide range of trade finance services can be used to generate short-term financing including Supply Chain Finance. (For more details see Supply Chain Finance & Trade Finance.)
  • Asset Based Financing including leasing, raising loans backed by inventory, real estate, securitization, etc. can also be used to generate short-term finance. 

Each company's combination of financing solutions they use will vary depending their treasury policy and existing banking relationships.

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