- a form of debt for money borrowed that is not backed by the pledge of specific assets.
Only done by banks.
Assets purchased generate funds to pay the loan.
Buyer signs a promissory note with how and when payment occurs.
Line of Credit
Terms of Sale:
COD and CBDcash on delivery or cash before delivery
Net PeriodNo cash discount- seller specifies amount of time debt must be paid by.
Net PeriodCash discount- If the bill is paid within stated period of time, a discount is received.
rate charged on short term business loans to financially sound companies.
Often now serves as a benchmark rate.
Companies can pay less than prime rate because of competition.
London Interbank Offered Rate (LIBOR):
the interest rate that world
Finance considers the cost of funds to carry inventory and handling and storage costs.
JIT- produce it exactly when its needed.
Inventories increased until the cost of holding inventories exceeds benefits
Classification: What to Control
ABC: controls expe
Companys Own Experience: study of promptness of past payments.
All pertain to the 3 Cs of credit: character (willingness to honor it), capacity (ability to
meet it), and capital (creditors net worth and its relation to debt.
Collection Policy and Procedures
Expenditures have little effect in beginning, then significant effect, then at a saturation
point almost no effect.
Collection efforts must be made with discretion.
You want the money, but you dont want to anger good custo
Lowering credit standards increases demand and profits, but increases risk.
Length of credit period, cash discount for early payment, and collection program of firm
determine the average collection period and the proportion of credit sales tha
Cash Discount Period:
period when a cash discount can be taken for early payment.
A cash discount is the % taken off.
What must be determined is if the speedup in collections would more than offset the
cost of an increased discount.
If discount is 2/10 an
Amounts owed but not yet paid for wages, taxes, interest, and dividends.
It is a short-term liability. Rise and fall with firms operations.
Interest free source of financing. They must almost always be paid on time.
Money Market Credit
Accounts payable and accrued expenses are spontaneous because they arise naturally
from day to day transactions.
Trade liabilities: money owed to suppliers.
Trade credit: credit guaranteed from one business to another. (supplier)