This lesson examines short-term funding solutions used to manage liquidity.

4.1. Short-Term Borrowing Solutions

When facing a funding shortfall, treasury can arrange short-term borrowing. Options include:

• Overdrafts: A flexible, uncommitted facility.

• Committed Facilities (Revolving Credit Facilities – RCFs): A line of credit where the bank is obligated to provide funds.

• Money Market Lines: Short-term borrowing directly in the wholesale money market.

• Bills of Exchange and Term Loans: Other forms of short and medium-term borrowing.

RCFs provide certainty of funding and are more flexible as liquidity needs can be better matched to the business. Overdrafts, on the other hand, are uncommitted and the bank could withdraw the facility at short notice.

4.2. Money Markets and Commercial Paper

Money markets are the primary market for short-term debt instruments. Commercial Paper (CP) is a key short-term instrument—an unsecured promissory note issued by a corporation. Understanding key market conventions is critical for evaluating costs. For example, market returns are quoted at a discount rate, and the day count convention for issues is 365 days.

4.3. Evaluating Borrowing Solutions

Treasury must evaluate the most appropriate short-term borrowing solution, considering factors such as cost, flexibility, and the certainty of funding.