Financing - Short-term (Working Capital) Flashcards Preview

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Flashcards in Financing - Short-term (Working Capital) Deck (8):
1

Short-Term

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

2

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

3

Advantages of STANDBY CREDIT

Commonly available for creditworthy

No collateral required

Highly flexible

4

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

5

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

6

Pledging AR

Using AR as security for short-term borrowing

Depends on creditworthiness of AR

Level of lender's recourse

7

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

- CHARGES FEE KNOWN ASS "FACTOR'S FEE"

8

Inventory

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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