Short term financing. According to the Vietnam Association of Seafood Exporters and Producers (VASEP), by the end of 2020, the pangasius export industry only brought in a turnover of about US 1.54 billion, a sharp decrease of 23% compared to 2019. This result is not too surprising because right from the beginning of 2020, pangasius has continuously decreased turnover due to the impact of epidemics and impacts from decreasing demand. However, Mr. Truong Dinh Hoe General Secretary of VASEP
Importance of short-term financing for a firm Short-term financing is usually aligned with a company's operational needs It provides shorter maturities (often less than 18 months or even year) than long-term financing, which makes it better-suited for fluctuations in working capital and other ongoing operational expenses When a firm use a source of short-term financing, an important principle to keep in mind is that the term length of your financing should match up with the term length of your financial needs There are various factors need taking into account before processing a short-term financing Interest rates Financial creditworthiness Collateral requirements Repayment schedules All these must be quantified and strategically determined because there will be many kinds of risk which can arise from intrinsic characteristics of short-term financing that a firm chooses Here are important sources of short-term financing Commercial Bank loan Commercial Paper Secured financing (Invoice discounting, factoring) Each of them comes with not only conveniences but also potential risks for a firm Secured financing : Firms obtain secured loans by providing accounts receivables or inventory as collateral security Accounts receivables may be used as a security by invoice discounting or factoring In invoice discounting, the lender decides which invoices to select, gives the firm some money which is a percentage of total value of Accounts and the firm will be responsible for customers’ default In factoring, firm sells receivables to lender and lender firm agrees to pay to the firm the amount due minus factoring fee at the end of firm’s payment period A factoring arrangement may be with recourse (lender to take money from the borrower if the customers default) and without recourse (lender to bear the bad debts) As we can see in this case, the firm is exposed to some kind of counterparty risk (customers’ default) or possible late payments coming from customers Inventory can be used as a collateral for a loan in three ways : Floating Lien (a higher interest rate is charged as the value of inventory may dwindle); Trust Receipt (Selected inventory items are held in a trust as security for the loan – As items are sold, the borrower remits the proceeds to the lender in repayment) and Warehousing Arrangement (least risky collateral arrangement) Commercial bank loan Borrowing short term loans from a commercial bank is usually a good choice for a firm with short term financing need Banks often provide three kinds of loans which are Single, End-of-period Payment Loan and Business Line of Credit In End-of-period Payment Loan, firms pay fixed or floating interest rate on the loan and payback the principal at the end of the loan In a low interest rate environment, there will not be too risky for a firm which have to pay floating rates in short term However, in a high one, the firm might be exposed to a significant interest rate risk Hence, hedging with some financial instrument like swap should be a good option for the firm Besides, having a new short term loan with some kind of periodic payments means adding a new element in hedging maturity mismatch between assets and liabilities of the firm For certain kind of business such as insurance, this is quite a big issue and they often come to an investment bank and buy some complex interest rate derivatives which hedges duration mismatches ... collateral arrangement) Commercial bank loan Borrowing short term loans from a commercial bank is usually a good choice for a firm with short term financing need Banks often provide three kinds of... rate environment, there will not be too risky for a firm which have to pay floating rates in short term However, in a high one, the firm might be exposed to a significant interest rate risk Hence,... some financial instrument like swap should be a good option for the firm Besides, having a new short term loan with some kind of periodic payments means adding a new element in hedging maturity