19. Short-Term Financing - Receivables and Inventory

Disadvantages of pledging accounts receivable (3)

1. accounts are committed to the lender 2. cost may be greater than certain other sources of short-term financing 3. required repayment in the short term.

Advantages of factoring accounts receivable (5)

1. commonly available 2. flexible - new receivables are available as security 3. compensating balances are not required 4. provides cash for general use 5. buyer generally assumes billing and collection responsibilities

Advantages of pledging accounts receivable (5)

1. commonly available 2. flexible - new receivables are available as security 3. compensating balances are not required 4. provides cash for general use 5. lender may assume billing and collection services

Advantages of inventory secured financing (4)

1. commonly available for certain inventories (e.g., crude oil, wheat, gold, etc.) 2. flexible - new inventory is available as security 3. compensating balances are not required 4. provides cash for general use

Disadvantages of factoring accounts receivable (3)

1. cost may be greater than other sources of short-term financing 2. if sold with recourse, the firm may have ongoing risk 3. sale of their accounts may alienate some customers

Types of inventory secured financing agreements (4)

1. floating lien agreement 2. chattel mortgage agreement 3. field warehouse agreement 4. terminal warehouse agreement

Disadvantages of inventory secured financing (4)

1. pledged inventory may not be available when needed 2. cost can be higher than other sources of short-term financing 3. requires quick repayment 4. not available for certain types of inventory

Inventory secured loan

A firm pledges all or part of its inventory as collateral for a short-term loan. The amount that can be borrowed depends on the value and marketability of the inventory.

Pledging accounts receivable

A firm pledges some or all of its accounts receivable as collateral for a short-term loan from a commercial bank or finance company.

Chattel mortgage agreement

The borrower gives a lien agains specifically identified inventory and retains control of the inventory, but cannot sell it without the lender's approval.

Floating lien agreement

The borrower gives a lien against all of its inventory to the lender, but retains control of its inventory, which it continuously sells and replaces.

Sale without recourse

The factor bears all risk regarding collectibility.

Factor's fee

The factor charges a fee based on the creditworthiness and length of maturity of the receivables, and to the extent the factor assumes risk of uncollectibility.

Sale with recourse

The factor has recourse against the firm for some or all of the risk associated with uncollectibility.

Terminal warehouse agreement

The inventory used as collateral is moved to a public warehouse where it is held as security.

Field warehouse agreement

The inventory used as collateral remains at the firm's warehouse, placed under the control of an independent third-party and held as security.

Factoring accounts receivable

The sale of accounts receivable to a commercial bank or other financial institution (called a "factor").