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Sources of Short-Term
Financing
Receivables Financing
Pledging Accounts Receivable
Factoring Accounts Receivable
Inventory Financing
Types of Inventory Financing
Spontaneous Financing
Accruals
For example, money you owe employees for work
they have performed but not yet been paid
Tend to be very short-term
Trade Credit
Seller lends buyer purchase price from
time of shipment to time of payment
No security and no interest
Seller may offer cash discount for early
payment
Cost of forgoing a cash discount:
% discount
365
APR =
Example
% discount
365
=
A:
2
365
=
100 - 2 30 - 10
= 37.24%
Revolving credit
Legally commits the bank
Usually secured
Requires commitment fee on unborrowed
funds
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Example
Example 5.1:
Revolving Credit
Agreement
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Example 5.1:
Example
A:
Revolving Credit
Agreement
15
0.01 + $2,000,000
$50,000
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Clean Up Requirements
Theoretically a firm can constantly rollover its short-term debt
Borrow on a new note to pay off an old note
Risky for both firm and bank
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Receivables Financing
Receivables Financing:
Lenders may extend credit backed by the
value of accounts receivable
Receivables may make excellent collateral:
Fairly liquid
Easy to recover in event of default
Collectibility of accounts is key issue
Common arrangements
PledgingFirm retains title
FactoringFirm sells A/R
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Example
Example 5.2:
Pledging Accounts
Receivable
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Example
Example 5.2:
Pledging Accounts
Receivable
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Inventory Financing
Use firms inventory as collateral for a
short-term loan
Popular but subject to number of
problems
Lenders arent usually equipped to sell
inventory
Specialized inventories and perishable goods
are difficult to market
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Commercial Paper
Notes issued by large, financially-strong
firms and sold to investors
Unsecured (usually)
Buyers are usually other corporations and
financial institutions
Maturity is less than 270 days
Considered very safe investment, therefore
pays a relatively low interest rate (sold at a
discount)
No flexibility in repayment terms
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Commercial Paper
Annual Interest Rate on Discounted
Money Market Security
r=
(M-P)
P
365
d
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Bankers Acceptances
bankers acceptancecreated when a bank adds
guarantee of payment to the promissory note or
draft of the issuer (corporate borrower)
Issuer receives money from bank. Bank then sells
the bankers acceptance in the money market to an
investor.
At maturity, bank repays face value to the investor
and the issuer repays bank
Traded on a discount basis to yield interest rate
slightly lower than that of commercial paper
Usual terms are 30, 60, and 90 days.
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Securitization of Receivables
Sale of receivables by large firms in
public offerings arranged by securities
dealers
The issuing firm thus receives immediate
cash for future cash flows
Financing is raised at a relatively low
cost, often lower than prime or
commercial paper rate, because the issue
is asset-backed.
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