Financing - Short-term (Working Capital)

Question 1

Short-Term

Answer 1

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

Question 2

Stand-by Credit

Answer 2

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

Question 3

Advantages of STANDBY CREDIT

Answer 3

Commonly available for creditworthy

No collateral required

Highly flexible

Question 4

Disadvantages of STANDBY CREDIT

Answer 4

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

Question 5

Commercial Paper

Answer 5

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

Question 6

Pledging AR

Answer 6

Using AR as security for short-term borrowing

Depends on creditworthiness of AR

Level of lender’s recourse

Question 7

Factoring AR

Answer 7

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”

Question 8

Inventory

Answer 8

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