Reading Tasks

I. Answer the questions using the information from the text.

1. What are five short-term sources of funds for financing day-to-day operations?

2. What are the most common forms of trade credit?

3. What are the advantages and disadvantages of secured and unsecured loans?

4. What is commercial paper?

5. How do you define factoring accounts receivable?

6. What are the primary sources for long-term financing?

7. What is debt financing?

8. In what ways do the two sources for debt financing differ from each other?

9. What is equity financing?

10. How does common stock differ from preferred stock?

11. What are retained earnings?

12. What is venture capital?

II. Mark these statements t (true) or f (false) according to the information in the text. Find the part of the text that gives the correct information.

1. Accounts payable are not a source of funds to the company.

2. Unsecured loan is a loan in which the borrower is required to put up collateral.

3. Selling commercial paper can be an important source of funds for large and creditworthy firms attempting to raise money.

4. Factoring can make it easier for a small business to get started.

5. Long-term loans are not attractive to the borrowing companies.

6. In exchange for funds the venture capitalist receives shares of the corporation's stock and becomes a part-owner of the corporation.

7. The use of retained earnings means that the firm will have to borrow money and pay interest on loans or bonds.

8. Commercial banks make short-terms loans on the basis of previous experience in dealing with the firm and the firm's credit reputation.

9. Long-term loans generally cost more than short-term loans since they involve greater uncertainty about the future.

10. Equity capital includes the use of long-term loans or the issuing of bonds.

11. Open-book credit typically involves a formal contract.

12. A revolving credit agreement is not a guaranted line of credit.

III. Without looking back at the next, exchange its content with someone who read the text too. Writing and Speaking Tasks

I. Write sentences with the following words.

Example: long-term / and / uses / debt financing / corporate / loans / bonds

Debt financing uses long-term loans and corporate bonds.

1. issue / some / paper / commercial / large firms

2. the proper mix / must / debt / and / equity / financial planners / choose / of / preferred stock funding

3. strategy / the list risky / is / most expensive / equity financing / of / the use / and

4. are available / as well as / lines of credit / to / individuals / businesses

5. promissory notes / most / a maturity / have / 30 to 90 days / of

6. be repaid / one year / must / sources of funds / within / short-term

7. that / accounts receivable / are factored / at a discount / are sold

8. overreliance / reduces / on / management flexibility / borrowed funds / in future decisions

9. accounts receivable / sell / retailers / and / furniture / of / appliances / factors / to

10. funds / long-term / from / be obtained / may / or / debt capital / equity financing

II. Write questions to the following answers.

1............................................................................

To finance their short-term expenditures, firms rely on credit extended by suppliers (trade credit) and on secured and unsecured loans.

2............................................................................

The credit terms are stated on the supplier's invoice, or bill, which accompanies the shipment.

3............................................................................

The three types of unsecured short-term loans made by commercial banks are promissory notes, lines of credit, and revolving credit agreements.

4............................................................................

Because commercial paper is unsecured - backed by only the reputation of the issuing firm - only very large firms with unquestioned financial stability are able to issue and sell it.

5............................................................................

Issuing commercial paper to raise funds is usually 1 or 2 percent cheaper than borrowing short-term funds from a bank.

6............................................................................

Selling the accounts receivable to a factor means every sale is a «cash» sale and the firm is freed from the necessity of collecting payments from customers.

7............................................................................

Factors make profits by paying less for the accounts receivable than their face value, so businesses pay a high price for using this approach,

8............................................................................

Long-term loans are made by financial institutions such as commercial banks, insurance companies, and pension funds.

9..........................................................................

The corporate bond is issued according to the terms of a legal contract called the bond indenture, which contains the provisions of the loan: amount, interest rate, and maturity date.

10.........................................................................

Raising needed cash by borrowing allows the firm to benefit from the principle of leverage - a technique of increasing the rate of return on investment through the use of borrowed funds.