MGT 2500 - Chapter 8.1: Sources of ST Finance F24.

Commercial paper is an unsecured short-term IOU (receivable) from a large financially secure company.

Approximately 50% of short-term financing is in the form of accounts payable or trade credit.

The largest source of short-term funds for most companies is suppliers (trade credit).

A compensating balance will be lower in periods of tight money than in periods of credit ease.

On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit.

The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.

Compensating balances represent unfair hidden costs of borrowing.

Issuers of commercial paper can be divided into finance companies and industrial or utility firms.

Accounts payable is a spontaneous source of funds that grows as the business expands.

Larger firms tend to be net users of trade credit.