Apply for a long Term LoanApplication for a long-term loan
Assume a business is entering a new commodity store and is expecting a loss for the first two to three years of trade. Through the 6-month temporary loan from its mother institution, it raises constantly rising sums of money until it begins to trade profitably in year 3, when the sums raised begin to fall.
There would be no reason to assume that the firm would pay back outstanding credits and waive further credits while still making a loss. If the financing needs are long-term, then all credits that serve the purposes are long-term credits. Financing needs are not only short-term because of the temporary availability of resources to pay back a loan.
Let us therefore assume that in January 2012 a corporation will raise capital from another Group member to finance a dividends. It will receive a dividends from its affiliate in December 2012 which will enable it to pay back the loan. It has a long-term financing need which decreases each year as it retains temporary resources before it distributes them to its mother comany.
Neither of the other Group companies' borrowings is short-term. The British enterprise is continuously borrowing from its foreign affiliate, which is very cash-generating. UK corporation uses the funds to distribute dividend to stockholders, repurchase stock and make supplementary contribution to Group pensions fund. All of the subsidiary's borrowings are short-term bonds with a term of three month, which are continuously extended and raised.
UK firm could cover its credit needs by asking affiliate to disburse its excess liquid funds as a dividend, but decides not to do so, perhaps because of the Group' s ability to arbitrate taxes. This British corporation has a long-term financing need. On September 1, 2013, Enterprise X will issue a 5-year promissory note loan to its Group colleagues Y in a timeframe in which the global Group will end on December 31, 2013.
During the following accounting cycle, Enterprise XX becomes bankrupt and Enterprise XX resolves to discharge its debts, and the promissory note is terminated on 15 May 2014. Assessing whether a long-term financing objective exists must take place on 1 September 2013. Evidence that Issuer X spent 5 -year bonds indicates that it has a long-term financing need and it would not have been sensible at the outset to have expected the loan ratio to be terminated within 12 month although it did in this case.
Undertakings X and Y can therefore not make a choice for the promissory note pursuant to § 319.