Page 89 - DBP5043

TYPES OF SHORT-TERM FINANCING:

But the interest rates above are just an explicit costs and
do not reflect the actual cost for not taking other factors

that affect the cost of financing such as the present value
of money and expenses incurred to obtain financing.

In this chapter, we will obtain the actual value of the
interest rate to provide the most accurate picture of the

financing costs after taking into account other factors. It is
termed as the effective cost (EC). The calculation of cost

effective is as follows:

EC = Interest

Principal x Time

In determining the EC for bank loans are some important
factors, such as:

i. The amount borrowed (Principal)

ii. Interest Rates
iii. Loan Period

iv. Compensating Balance (CB) - an amount that should be
kept and maintained in the customer's bank account as the
balance of the loan period. It is the additional conditions

imposed by banks when customers fail to pay loan