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Unformatted text preview: a warehouse on the borrower’s premises or to lease part of the borrower’s
warehouse to store the pledged collateral. Regardless of which type of warehouse
is used, the warehousing company places a guard over the inventory. Only on
written approval of the lender can any portion of the secured inventory be
released by the warehousing company.
The actual lending agreement specifically states the requirements for the
release of inventory. As in the case of other secured loans, the lender accepts only
collateral that is believed to be readily marketable and advances only a portion—
generally 75 to 90 percent—of the collateral’s value. The specific costs of ware- CHAPTER 15 WW
W Current Liabilities Management 655 house receipt loans are generally higher than those of any other secured lending
arrangements because of the need to hire and pay a warehousing company to
guard and supervise the collateral. The basic interest charged on warehouse
receipt loans is higher than that charged on unsecured loans, generally ranging
from 3 to 5 percent above the prime rate. In addition to the interest charge, the
borrower must absorb the costs of warehousing by paying the warehouse fee,
which is generally between 1 and 3 percent of the amount of the loan. The borrower is normally also required to pay the insurance costs on the warehoused
merchandise. An example of the procedures and costs of a warehouse receipt
loan is included on the book’s web site at www.aw.com/gitman. Review Questions
15–11 Are secured short-term loans viewed as more risky or less risky than
unsecured short-term loans? Why?
15–12 In general, what interest rates and fees are levied on secured short-term
loans? Why are these rates generally higher than the rates on unsecured
15–13 Describe and compare the basic features of the following methods of
using accounts receivable to obtain short-term financing: (a) pledging
accounts receivable, and (b) factoring accounts receivable. Be sure to
mention the institution...
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