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Unformatted text preview: On transactions between subsidiaries, “netting” can
be used to minimize foreign exchange fees and other
LG4 Explain the characteristics of secured short-term
loans and the use of accounts receivable as
short-term-loan collateral. Secured short-term loans
are those for which the lender requires collateral—
typically, current assets such as accounts receivable
or inventory. Only a percentage of the book value of
acceptable collateral is advanced by the lender. These
loans are more expensive than unsecured loans; collateral does not lower the risk of default, and
increased administrative costs result. Both commercial banks and commercial finance companies make
secured short-term loans. Both pledging, which is the
use of accounts receivable as loan collateral, and factoring, which is the outright sale of accounts receivable at a discount, involve the use of accounts receivable to obtain needed short-term funds. The key
features of loans using accounts receivable as collateral are summarized in part III of Table 15.2.
LG5 Describe the various ways in which inventory
can be used as short-term-loan collateral.
Inventory can be used as short-term-loan collateral
under a floating lien, a trust receipt arrangement, or
a warehouse receipt loan. The key features of loans
using inventory as collateral are summarized in part
III of Table 15.2.
LG6 Suppliers of
merchandise Accruals Commercial banks (3) Revolving credit
agreements Business firms—
and financial Commercial banks (2) Lines of credit Commercial paper Commercial banks (1) Single-payment notes Bank sources II. Unsecured sources of short-term loans Employees and
government Accounts payable I. Spontaneous liabilities Source Generally 2% to 4% below the prime rate of
interest. Prime plus 0% to 4% risk premium—fixed or
floating rate. Often must maintain 10% to 20%
compensating balance and pay a commitment fee
of approximately 0.5% of the average unused
balance. Prime plus 0% to 4% risk premium—...
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