Floating inventory liens floating inventory lien a

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Unformatted text preview: m could be difficult. When evaluating inventory as possible loan collateral, the lender looks for items with very stable market prices that have ready markets and that lack undesirable physical properties. Floating Inventory Liens floating inventory lien A secured short-term loan against inventory under which the lender’s claim is on the borrower’s inventory in general. A lender may be willing to secure a loan under a floating inventory lien, which is a claim on inventory in general. This arrangement is most attractive when the firm has a stable level of inventory that consists of a diversified group of relatively inexpensive merchandise. Inventories of items such as auto tires, screws and bolts, and shoes are candidates for floating-lien loans. Because it is difficult for a lender to verify the presence of the inventory, the lender generally advances less 654 PART 5 Short-Term Financial Decisions WW W than 50 percent of the book value of the average inventory. The interest charge on a floating lien is 3 to 5 percent above the prime rate. Commercial banks often require floating liens as extra security on what would otherwise be an unsecured loan. Floating-lien inventory loans may also be available from commercial finance companies. An example of a floating lien is included on the book’s Web site at www.aw.com/gitman. Trust Receipt Inventory Loans trust receipt inventory loan A secured short-term loan against inventory under which the lender advances 80 to 100 percent of the cost of the borrower’s relatively expensive inventory items in exchange for the borrower’s promise to repay the lender, with accrued interest, immediately after the sale of each item of collateral. A trust receipt inventory loan often can be made against relatively expensive automotive, consumer durable, and industrial goods that can be identified by serial number. Under this agreement, the borrower keeps the inventory, and the lender may advance 80 to 100 percent of its cost. The lender files a lien on all the items fi...
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