What are the best sources of short-term borrowing for your treasury management needs?

Exploring optimal avenues for short-term borrowing is pivotal for effective treasury management. Considering factors like liquidity, cost, and risk tolerance, avenues such as commercial paper, lines of credit, or even supplier financing could merit consideration. Each option carries its own advantages and potential drawbacks, hence conducting a thorough analysis aligned with organizational goals is imperative. Open dialogue and collaboration with financial partners can also offer valuable insights tailored to specific needs.

Bank loans and lines of credit are great ways of securing financing for your business. Managing your cash flow with a loan can be challenging. A sweep account assists cash flow challenges by automating cash transfers to reduce the loan balance and lower interest costs. With a sweep account, excess funds from a checking account can be used to pay down the loan principal, minimizing idle cash and maximizing interest savings. This provides efficiency within your treasury. It’s important to consider any associated fees and ensure the account aligns with your loan type. Overall, a sweep account optimizes your funds, reduces interest expenses, and simplifies financial management.

My contribution is more relative to KSA market: Traditional Banking: Bank loans: Offer predictable rates and repayment schedules, but require collateral and stringent approval processes. Lines of credit: Provide flexibility, but come with interest on drawn amounts and potential commitment fees. Overdrafts: Offer immediate access to funds. Trade finance: Suppliers may offer extended payment terms or financing options. Invoice factoring/discounting: Sell receivables at a discount for immediate cash. Sukuk financing: Sharia-compliant Islamic bonds, but involve complex structures. Peer-to-peer lending: Online platforms connect borrowers with lenders, but offer higher interest rates and may lack security compared to banks

If you need finance for short-term funding requirements, there are two elementary things you should consider - availability and cost. Generally, these two variables have an inverse relationship. There are several options available to companies, such as lines of credit, bank short-term borrowing, and overdrafts. Moreover, if your business has another source of currency flow, you could also consider engaging in funding swaps. Banks use short-term money market instruments such as Interbank Call and Repo for daily funding. Additionally, Central Banks offer OMO auctions and daily standing lending facilities for any funding requirements.

Bank loans and lines of credit are one of the widest-used sources of short-term borrowing. If you are a bank you can borrow from the inter-bank money market or inter-bank repo market. You have different options starting from overnight borrowing up to longer tenors like 1 week or 1 month. These options are flexible and comparatively very easy. If you are borrowing foreign currency you can also borrow from foreign banks.

Establishing a Commercial Paper (CP) program serves as an effective source of short-term financing. CP represents an unsecured promissory note issued by companies with strong credit ratings as evaluated by credit rating agencies. While it offers a cost-effective means of funding, the establishment of a CP program entails significant efforts and considerable fixed and variable costs. Pursuing a CP program is advisable primarily when the funding requirements are substantial and ongoing.

Supply chain finance (SCF) can be a great source to ease up cashflow constraints. Supply chain finance plays a crucial role in short-term borrowings, particularly in enhancing liquidity and optimizing working capital for businesses. It is an arrangement where buyers and sellers in a trading relationship utilize financial intermediaries, usually banks or specialized finance companies, to facilitate better cash flow and reduce risk across the supply chain. For buyers, supply chain finance allows for extended payment terms, thereby increasing their days payable outstanding (DPO) and preserving cash on hand. This helps in maintaining a healthier balance sheet and can be used to negotiate better terms with suppliers.

Invoice discounting if carefully structured can be treated as a pure cash improvement if the deal is structured as a true sale without recourse. In such circumstances, not only would the company be able to raise cash but would also benefit from lower debt and is likely to be excluded from debt by S&P, Moodys and Fitch, provided that it achieves accounting treatment as a true sale and the documentation is simple, with no or extremely limited recourse. This can be a great way to achieve liquidity and lower debt. The amount available will increase and decrease as the debtor balance varies