SEC B-2 Types of Short-term Credit

first way is by obtaining a bank loan using the accounts receivable as collateral. second way is to sell the rights to the accounts receivable, referred to as factoring

Firms finance their accounts receivable in two ways. IDENTIFY 2 WAYS

Informal line of credit

is a verbal agreement that a firm can borrow an agreed-upon amount of money.

formal line of credit

is an agreement with a legal obligation for the bank to lend an agreed-upon amount of money.

commercial paper

is not secured; however, a related financial instrument called bankers' acceptances are short-term notes payable issued by firms yet backed or guaranteed by a commercial bank.

Commercial paper

is short-term, unsecured notes payable issued by large firms with high credit ratings. It is usually issued in very large denominations (usually exceeding $100,000).

Lines of credit

sometimes carry commitment fees that a firm must pay on the unused portion of the credit line.

Factoring

takes place when a bank or financial institution buys a firm's accounts receivable without recourse

Trade credit or accounts payable

takes place when a firm makes and receives delivery of a purchase, but does not pay for it upon purchase. Instead, the firm is extended credit by the counterparty.

(1) trade credit, (2) short-term bank loans, (3) commercial paper, and (4) accounts receivable financing

Short-term credit to finance working capital requirements comes from several sources: Identify

Short-term loans

Term loans, lines of credit, secured and unsecured loans are a type of?

promissory note

The ___ ____ that includes the amount, maturity, interest rate, and debt covenants is called a -

lines of credit

allow businesses to borrow given amounts to a certain ceiling level assuming the firm makes minimum payments each month.

secured loans

are backed by collateral, meaning that if the borrower defaults on the loan, the bank can seize the asset serving as collateral for the loan. It also carry lower interest rates because the collateral reduces the cost of default risk to the bank.

Term loans

are payable by a certain date. Common bank loans are generally this type of loan.