Spontaneous Sources of Finance

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In business, "spontaneous finance" refers to financing that arises out of regular, day-to-day operations. Unlike with other common sources of financing, such as loans or bonds, obtaining additional spontaneous financing doesn't require any special action by the company; it just "happens," hence the name spontaneous. The two primary sources of spontaneous finance for most businesses are trade credit and accruals.

What's Meant by Finance

  • The "finance" in spontaneous finance doesn't simply refer to money; it refers to someone else's money. Think about purchasing a car. "Buying a car" means making a deal for the vehicle and driving it off the lot. "Financing a car" means taking out a loan to make that happen. In business, money that comes in from customers isn't typically referred to as financing. It's revenue, and it belongs to the company. Money or something of value that belongs to an outside party but is used by the company is financing.

Trade Credit

  • Trade credit is an essential source of spontaneous financing for most ongoing businesses. Trade credit is a "buy now, pay later" arrangement. For example, a store orders 100 boxes of chewing gum from a supplier. The supplier delivers the boxes and sends the store a bill. That's trade credit. Until the store pays the bill, the supplier is in effect financing the store's chewing gum inventory. When the store's business volume increases, it will order more inventory, using more trade credit. When business falls off, it orders less inventory and uses less credit. Bills owed on trade credit are identified in a company's books as accounts payable, commonly referred to as "payables."

Accrued Expenses

  • Employees might not think of themselves as floating their employers a loan, but in effect, that's what they're doing. If they get paid every two weeks, then the company regularly enjoys two weeks of their valuable labor without having to pay for it. Their wages are of course building up, or "accruing," and the company will pay them in due time. But until it does, the workers are helping finance the company. And it's not just them. The company is also continuously running up bills for utilities, taxes and other common expenses. Accrued expenses represent value the company has received but not yet paid for, just like inventory obtained on trade credit. And as the company hires more (or fewer) people or uses more (or less) electricity, these accruals will adjust automatically, or "spontaneously."

Extending Payables

  • It's a fact of business life that some companies will try to improve their cash-flow situation by holding on to spontaneous financing -- in other words, by delaying paying their bills. Companies that pay invoices within 30 days, for example, may move to a 45- or 60-day payment cycle, or longer. The longer a firm goes without paying a bill, the longer it gets to use someone else's money to finance its operations. But while doing this may produce short-term benefit, it can lead to long-term harm. As described by "CPA Practice Advisor" magazine, vendors, such as suppliers and contractors, can be alienated or driven away by such heavy-handedness -- or even driven out of business. Vendors may also react to the disruption in their own cash flow by raising their prices -- and maintaining those increases even if payment terms return to normal.

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