Ch15

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: On transactions between subsidiaries, “netting” can be used to minimize foreign exchange fees and other transaction costs. 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— both nonfinancial 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—...
View Full Document

This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online