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Unformatted text preview: fixed or
floating rate. Often must maintain 10% to 20%
compensating balance and clean up the line
annually. Prime plus 0% to 4% risk premium—fixed or
floating rate. Free. No stated cost except when a cash discount is
offered for early payment. Cost or conditions (continued) An unsecured short-term promissory note issued by
the most financially sound firms. A line-of-credit agreement under which the availability of funds is guaranteed. Often for a period
greater than 1 year. A prearranged borrowing limit under which funds, if
available, will be lent to allow the borrower to meet
seasonal needs. A single-payment loan used to meet a funds shortage
expected to last only a short period of time. Result because wages (employees) and taxes
(government) are paid at discrete points in time
after the service has been rendered. Hard to manipulate this source of financing. Credit extended on open account for 0 to 120 days.
The largest source of short-term financing. Characteristics Summary of Key Features of Common Sources of Short-Term Financing Type of
short-term financing TABLE 15.2 CHAPTER 15
Current Liabilities Management 657 Commercial banks
finance companies Commercial banks
finance companies (2) Factoring Manufacturers’
finance companies (1) Floating liens (2) Trust receipts (3) Warehouse receipts Selected accounts are sold—generally without
recourse—at a discount. All credit risks go with the
accounts. Factor will lend (make advances) against
uncollected accounts that are not yet due. Factor will
also pay interest on surplus balances. Typically
done on a notification basis. Selected accounts receivable are used as collateral.
The borrower is trusted to remit to the lender on
collection of pledged accounts. Done on a nonnotification basis. Inventory used as collateral is placed under control
of the lender either through a terminal warehouse or
through a field warehouse. A third party—a warehousing...
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