Short-term credit, or short-term financing, is any liability that is scheduled f

Question

Short-term credit, or short-term financing, is any liability that is scheduled for repayment within one year. Among the sources of short-term funds are banks, suppliers, securities firms, and insurance companies. Their securities (or obligations) can take the form of bank loans, trade credit, commercial paper, and accruals. S financing are easier to obtain and manage than others. Financial managers should consider the costs of the various sources of financing as part of a business's cash management strategy ome types of short-term The following statement refers to a source of short-term credit. Select the best term to complete the following sentence: The credit that is created when a supplier sells goods and services on an account with extended payment terms is called Garcia Production Inc. is a manufacturing company. Garcia's financial managers use many sources of financing for the company's annual borrowings, which exceed $100 million. Garcla's credit rating is excellent. At the moment, the managers are looking to fund a s5 million payroll by issuing a note with a 30-day maturity. what type of financing is this? O Commercial paper O Trade credit O Bank loans O Accrual

Explanation / Answer

a. The answer is trade credit.
Trade credit refers to credit received from suppliers and vendors with a fixed payment term, sometimes with a discount offered on early payment. Trade credit is usually considered the cheapest form of credit, since it does not include any interest payments. Of course, on late payment, certain suppliers charge penalties and interest. Exploitation of trade credit can result in loss of goodwill.

b. The answer is commercial paper.
Commercial paper refers to short-term, unsecured, often-high interest rate debt instruments which companies use in order to raise short-term finance and meet immediate liabilities and dues. It is a common tool used in working capital management.

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