Chapter 16

management by the firm of the time that elapses between its purchase of raw materials and its mailing payment to the supplier

accounts payable management

liabilities for services received for which payment has yet to be made

accruals

the requirement that for a certain number of days during the year borrowers under a line of credit carry a zero loan balance

annual cleanup

lending institutions that make only secured loans-both short-term and long-term - to businesses

commercial finance companies

form of financing consisting of short-term , unsecured promissory notes issued by firms with a high credit standing

commercial paper

often applies to the average unused portion of the borrower's credit line

commitment fee

the fee that is normally charged on a revolving credit agreement

commitment fee

a required checking account balance equal to a certain percentage of the amount borrowed from a bank under a line-of-credit or revolving credit agreement

compensating balance

the implied rate of interest paid to delay payment of an account payable for an additional number of days

cost of giving up a cash discount

loan on which interest is paid in advance by being deducted from the amount borrowed

discount loan

financial institution that specializes in purchasing accounts receivable from businesses

factor

the outright sale of accounts receivable at a discount to a factor or other financial institution

factoring accounts receivable

a loan with a rate of interest that is determined at a set increment above the prime rate and remains unvarying until maturity

fixed-rate loan

secured short-term loan against inventory under which the lender's claim is on the borrower's inventory in general

floating inventory lien

a loan with a rate of interest initially set at an increment above the prime rate and allowed to float, or vary, above prime as the prime rate varies until maturity

floating-rate loan

letter written by a company's bank to the company's foreign supplier, stating that the bank guarantees payment of an invoiced amount if all the underlying agreements are met

letter of credit

a publicly disclosed legal claim on loan collateral

lien

agreement between a commercial bank and a business specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time

line of credit

the basis on which a borrower, having pledged an account receivable, continues to collect the account payments without notifying the account customer

nonnotification basis

the basis on which accounts receivable are sold to a factor with the understanding that the factor accepts all credit risks on the purchased accounts

nonrecourse basis

contractual restrictions that a bank may impose on a firm's financial condition or operations as part of a line-of-credit agreement

operating -change restrictions

the percentage of the book value of the collateral that constitutes the principal of a secured loan

percentage advance

the use of a firm's accounts receivable as security, or collateral, to obtain a short-term loan

pledge of accounts receivable

the lowest rate of interest charged by leading banks on business loans to their most important business borrowers

prime rate of interest (prime rate)

line of credit guaranteed to a borrower by a commercial bank regardless of the scarcity of money

revolving credit agreement

short-term financing (loan) that has specific assets pledged as collateral

secured short-term financing

the agreement between the borrower and the lender that specifies the collateral held against a secured loan

security agreement

unsecured short-term loan in which the use to which the borrowed money is put provides the mechanism through which the loan is repaid

short-term, self I liquidating loan

short-term, one-time loan made to a borrower who needs funds for a specific purpose for a short period

single-payment note

financing that arises from the normal course of business

spontaneous liabilities

paying bills as late as possible without damaging the firm's credit rating

stretching accounts payable

a secured short-term loan against inventory under which the lender advances 80 to 100 percent of the cost of the borrower's relatively expensive inventory items in exchange for the borrower's promise to repay the lender, with accrued interest, immediately after the sale of each item of collateral

trust receipt inventory loan

short-term financing obtained without pledging specific assets as collateral

unsecured short-term financing

secured short-term loan against inventory under which the lender receives control of the pledged inventory collateral, which is stored by a designated warehousing company on the lender's behalf

warehouse receipt loan