Chapter 8: Sources of Short-Term Fianancing

Compensating Balance

A bank requirement that business customers maintain a minimum average balance. The required amount is usually computed as a percentage of customer loans outstanding or as a percentage of the future loans to which the bank has committed itself.

Installment Loan

A borrowing arrangement in which a series of equal payments are used to pay off a loan.

Dealer Paper

A form of commercial paper that is distributed to lenders through an intermediate dealer network. It is normally sold by industrial companies, utility firms, or financial companies too small to have their own selling network.

Direct Paper

A form of commercial paper that is sold directly by the borrower to the finance company. It is also referred to as finance paper.

Finance Paper

A form of commercial paper that is sold directly to the lender by the finance company. It is also referred to as direct paper..

Discounted Loan

A loan in which the calculated interest payment is subtracted, or discounted, in advance. Because this lowers the amount of available funds, the effective interest rate is increased.

Self-Liquidating Loan

A loan in which the use of funds will ensure a built-in or automatic repayment scheme.

Financial Futures Market

A market that allows the trading of financial instruments related to a future point in time. A purchase or sale occurs in the present, with a reversal necessitated in the future to close out the position. If a purchase (sale) occurs initially, then a sale (purchase) will be necessary in the future. The market provides for futures contracts in Treasury bonds, Treasury bills, certificates of deposits, GNMA certificates, and many other instruments. Financial futures contracts may be executed on the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Futures Exchange, and other exchanges.

Annual Percentage Rate (APR)

A measure of the effective rate on a loan. One uses the actuarial method of compound interest when calculating the APR.

Net Trade Credit

A measure of the relationship between the firm's accounts receivable and accounts payable. If accounts receivable exceed accounts payable, the firm is a net provider of trade credit; otherwise, it is a net user.

Cash Discount

A reduction in the invoice price if payment is made within a specified time period. An example would be 2/10, net 30.

Blanket Inventory Liens

A secured borrowing arrangement in which the lender has a general claim against the inventory of the borrower.

Book-Entry Transactions

A transaction in which no actual paper or certificate is created. All transactions simply take place on the books via computer entries.

Trust-Receipt

An instrument acknowledging that the borrower holds the inventory and proceeds for sale in trust for the lender.

London Interbank Offered Rate (LIBOR)

An interbank rate applicable for large deposits in the London market. It is a benchmark rate, just like the prime interest rate in the United States. Interest rates on Eurodollar loans are determined by adding premiums to this basic rate. Most often, LIBOR is lower than the U.S. prime rate.

Term Loan

An intermediate-length loan, in which credit is generally extended from one to seven years. The loan is usually repaid in monthly or quarterly installments over its life, rather than with one single payment.

Field Warehousing

An inventory financing arrangement in which collateralized inventory is stored on the premises of the borrower but is controlled by an independent warehousing company.

Public Warehousing

An inventory financing arrangement in which inventory, used as collateral, is stored with and controlled by an independent warehousing company.

Commercial Paper

An unsecured promissory note that large corporations issue to investors. The minimum amount is usually $25,000.

Asset-backed Commercial Paper

Commercial paper that is backed by a specific pledge of assets. This is an exception to the normal case in which commercial paper is unsecured.

Spontaneous Source of Funds

Funds arising through the normal course of business, such as accounts payable generated from the purchase of goods for resale.

Eurodollar Loan

Loans made by foreign banks denominated in U.S. dollars

Asset-Backed Securities

Public offerings backed by receivables as collateral. Essentially, a firm factors (sells) its receivables in the securities markets.

Factoring

Selling accounts receivable to a finance company or a bank.

Prime Rate

The rate that a bank charges its most creditworthy customers.

Hedging

To engage in a transaction that partially or fully reduces a prior risk exposure by taking a position that is the opposite of your initial position. As an example, you own some copper now but also engage in a contract to sell copper in the future at a set price.

Pledging Accounts Receivable

Using accounts receivable as collateral for a loan. The firm usually may borrow 60 to 80 percent of the value of acceptable collateral.