Introduction to Finance

Small Business Practice
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Vincent Ryan, “Advertise but Verify,” 
CFO Magazine
, (November 2012), page 21; Jamie Farrell; “The JOBS Act: 
What Startups and Small Businesses Need to Know,” accessed January 29, 2013, at http://www.forbes.com/sites/
work-in-progress/2012/09/21/the-jobs-act-what-startups-and-small-businesses-need-to-know-infographic/; McGladrey 
LLP, “An overview of the JOBS Act,” (May 1, 2012), http://mcgladrey.com/pdf/jobs_act_overview.pdf, accessed 
January 29, 2013.

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C H A PT E R 1 6 Short-Term Business Financing
16.4
Nonbank Short-Term Financing Sources
In addition to banks, businesses have several other sources they may be able to use to raise 
short-term fi nancing. In this section we review accounts payable, commercial fi nance com-
panies, and a fi nancing source for large businesses with good credit: commercial paper.
Trade Credit from Suppliers
The most important single form of short-term business fi nancing is the credit extended by one 
business organization to another. Accounts receivable together with longer-term notes receiv-
able taken by manufacturers, wholesalers, jobbers, and other businesses that sell products or 
services to businesses are known as trade credit.
The establishment of trade credit is the least formal of all forms of fi nancing. It involves 
an order for goods or services by one business and the delivery of goods or performance of 
service by the selling business. The purchasing business receives an invoice stating the terms 
of the transaction and the time period within which payment is to be made. The purchaser adds 
the liability to accounts payable. The seller adds the claim to accounts receivable. In some situ-
ations, the seller may insist on written evidence of liability from the purchaser. Such written 
evidence is usually in the form of a note payable by the purchaser; the seller considers it a note 
receivable. Before a business organization delivers goods or performs a service for another 
business, it must determine the purchaser’s ability and willingness to pay for the order.
9
The 
responsibility of such credit analysis in most businesses belongs to the credit manager.