Only on written approval of the lender can any

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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 short-term loans? 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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