Financing - Short-term (Working Capital) Flashcards Preview

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Flashcards in Financing - Short-term (Working Capital) Deck (8):


The concept of short-term financing generally applies to obligations that will become due within one year


Stand-by Credit

Arrangement to have financing available for a specific purpose or time;

3 forms

Line of credit - Informal agreement whereby a finacial institution will agree to maximum amount of credit that a will be extended at a point in time

- not legally binding

Revolving credit - Formal agreement whereby a financial institution or other lender agrees to a maximum amount of credit that WILL BE extended

-like LOC but legally binding

Letter of credit- Conditional commitment by a financial institution to pay a third party in accordance with specified terms and conditions


Advantages of STANDBY CREDIT

Commonly available for creditworthy

No collateral required

Highly flexible


Disadvantages of STANDBY CREDIT

Poor credit means higher interest rate

Typically involves a fee

Require satisfaction in short-term

Compensating balance increases effective cost and reduces finds available for use


Commercial Paper

Short-term unsecured promissory notes sold by highly-creditworthy firms

Most are 180 days or less

If more than 270 SEC registration required

- Interest rates generally lower
- Large amounts can be obtained
- No assets required
-Flexible spending


Pledging AR

Using AR as security for short-term borrowing

Depends on creditworthiness of AR

Level of lender's recourse


Factoring AR

Sale is AR

Buyer is called "FACTOR"

Without recourse - Factor bear risk associated with collectibility

With recourse- Facto has recourse for some or all of the risk associated with us collectibility of receivable




Inventory secured loans - Firm pledges all or part of inventory as collateral for short-term loan

Floating lien agreement - Borrower gives a lien on all inventory, but retains control of inventory which it sells and replaces

Chattel mortage - Lender has a lien on specific inventory buyer retains control but cannot sell without buyer's approval

Field warehouse agreement - Inventory remains at borrower's warehouse but control of an independent third party

Terminal warehouse agreement - Inventory moved to a public warehouse and placed under the control of an independent third party

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