Ch 16

Banks frequently require compensating balances of ____. Compensating balances not only force the borrower to be a good customer of the bank but may also ____.

10-20 %, raise the interest cost to the borrower

An interesting characteristic of commercial paper is that its interest cost is NORMALLY _______. in other words, firms are able to raise funds _____ by selling commercial paper than by borrowing from a commercial bank.

2% to 4% below the prime rate more cheaply

If the terms are net 30, the account should be paid ____ which is typically either the ____ or the ____.

30 days from the beginning of the CREDIT period, date of invoice, end of the month(EOM) in which the purchase was made

Paying interest in advance thus makes the EAR ____ than the stated annual rate.

GREATER

paying interest in advance thus makes EAR ______ the stated annual rate

GREATER THAN

The amount of a line of credit is the _____ at any point in time.

MAXIMUM amount the firm can owe the bank

_____ are floating-rate loans

MOST short-term business loans

Typically, the factor is ____ to pay the firm until the account is collected or until the last day of the credit period, whichever occurs ____.

NOT required, first

This type of short-term note GENERALLY has a maturity of 30 days to 9 months or more. The interest charged is usually tied in some way to the prime rate of interest.

SINGLE-PAYMENT NOTES

short-term financing obtained WITHOUT pledging specific assets as collateral

UNSECURED short-term financing

Cash discounts should be given up only when

a firm in need of short-term funds must pay an interest rate on borrowing that is GREATER than the cost of giving up the cash discount

The major spontaneous source of short-term financing is

accounts payable

They result from transactions in which merchandise is purchased but no formal note is signed to show the purchaser's liability to the seller.

accounts payable

primary source of SHORT-term funds

accounts payable

2 major short-term sources of spontaneous liabilities are:

accounts payable and accruals

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 (that is, owe the bank nothing)

annual cleanup

_____ are more popular because they are available to firms of ALL sizes.

bank loans

is the major source of unsecured short-term loans to businesses

banks

Businesses obtain UNsecured short-term loans from (2) major sources:

banks and sales of commercial paper

How can you lower the cost of giving up a cash discount?

by stretching accounts payable

how to reduce the implicit cost of giving up the cash discount?

by stretching accounts payable

Trust receipt loans are often made by manufacturers' wholly owned financing subsidiaries, known as _____, to their customers.

captive finance companies

The smaller the cash discount, the _____ the approximation to the ACTUAL cost of giving it up.

closer

they make short-term secured loans

commercial banks and commercial finance companies

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

commercial finance companies

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

commercial paper

is an unsecured IOU issued by firms with a high- credit standing

commercial paper

tends to be available only to LARGE firms

commercial paper

The primary sources of SECURED short-term loans to businesses are (2):

commercial paper and commercial finance companies

the fee that is normally charged on a revolving credit agreement

commitment fee

To ensure that the borrower will be a "good customer", many short-term UNsecured bank loans— single-payment notes and lines of credit — require the borrower to maintain, in a checking account, a _____ equal to a certain % of the amount borrowed.

compensating balance

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

are the most desirable short-term-loan collateral because they can normally be converted into cash much sooner than fixed assets

current assets

Commercial paper is sold at a ___ from its par, or face value.

discount

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

discount loan

grace period is

extends a few days beyond the stated payment date

a 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 insitution

factoring accounts receivable

under a ____, the lender hires a field-warehousing company to set up a warehouse on the borrower's premises or to lease part of the borrower's warehouse to store the pledged collateral.

field warehouse arrangement

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

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

floating inventory lien

This arrangement is most attractive when the firm has a stable level of inventory that consists of a diversified group of relatively inexpensive merchandise

floating inventory liens

This arrangement is most attractive when the firm has a stable level of inventory that consists of a diversified group of relatively inexpensive merchandise.

floating inventory liens

The interest rate on a line of credit is normally stated as a _____

floating rate: the prime rate plus a premium

The interest rate on a line of credit is normally stated as a

floating-rate - the prime rate plus a premium

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

The interest rate that is charged on secured short-term loans is typically ____ than the rate on unsecured short-term loans.

higher

The specific costs of warehouse receipt loans are generally ____ than those of any other secured lending arrangements because of the need to hire and pay a warehousing company to guard and supervise the collateral.

higher

The firm's accruals (services already received but you did not pay yet for the services received; opposite of deferrals) ______ as wages and taxes rise because of greater labor requirements and the increased taxes on the firm's increased earnings.

increase

firms can use ___ to finance international transactions

international loans

Generally, ONLY ____ are able to issue commercial paper.

large firms of unquestionable financial soundness

A compensating balance raises the cost of borrowing ONLY IF it is ____ than the firm's normal cash balance.

larger

a compensating balance raises the cost of borrowing only if the compensating balance is

larger than the firm's normal cash balance

In this case, the floating-rate loan would have been ____ than the fixed-rate loan because of its GENERALLY lower effective annual rate.

less expensive

although revolving credit agreement is more expensive than line of credit , at least its

less risky from the borrower's POV because the availability of funds is guaranteed

A 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

It is NOT a guaranteed loan; rather, it indicates that if the bank has sufficient funds available, it will allow the borrower to owe it up to a certain amount of money.

line of credit

The major attraction of a ____ from the BANK'S POV is that it eliminates the need to examine the credit-worthiness of a customer each time it borrows money within the year.

line of credit

an 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 more creditworthy the borrower, the ______ the premium (interest increment) above prime and vice-versa).

lower

Although the stated interest cost of borrowing through the sale of commercial paper is normally ____, the overall cost of commercial paper may not be less than that of a bank loan.

lower than the prime rate

Generally, the increment above the prime rate will be ____ on a floating-rate loan than on a fixed-rate loan of equivalent risk because the lender bears ____ risk with a floating-rate loan.

lower, less

The most important characteristic of inventory being evaluated as loan collateral is _____.

marketability

secured short-term loans are _____ than unsecured loans

more expensive

Although ____ than a line of credit, a revolving credit agreement can be ____ from the BORROWER'S POV because the availability of funds is guaranteed.

more expensive, less risky

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

the basis on which an account customer whose account has been pledged (or factored) is notified to remit payment directly to the lender (or factor)

notification basis

Factoring has certain advantages :

one is the ability it gives the firm to turn accounts receivable immediately into cash WITHOUT having to worry about repayment Another is it ensures a known pattern of cash flows In addition, if factoring is undertaken on a continuing basis, the firm can eliminate its credit and collection departments

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

Actually, only a ____ creates a secured short-term loan; ______ really entails the sale of accounts receivable at a discount.

pledge of accounts receivable, factoring

(2) commonly used means of obtaining short-term financing with accounts receivable are

pledging accounts receivable and factoring 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)

Paying interest in ADVANCE _____ the effective annual rate _____ the stated annual rate.

raises, above

Lenders recognize that holding collateral can ____ losses if the borrower defaults, but the presence of collateral has _____. A lender requires collateral to ____ of some portion of the loan in the event of default. What the lender wants above all, however is to repaid as scheduled. In general, lenders prefer to make ____ than to be in a position in which they must liquidate collateral.

reduce, no impact on the risk of default, ensure recovery, less risky loans at lower rates of interest

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

revolving credit agreement

IF the bank does NOT agree with the proposed changes and the firm makes them anyway, the bank has the ______.

right to revoke the line of credit

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

secured short-term financing

are those for which the lender requires collateral

secured short-term loans

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

security agreement

These loans are intended merely to carry the firm through seasonal peaks in financing needs that are due primarily to buildups of inventory and accounts receivable.

short-term, self-liquidating loan

an 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-liquidating loan

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

single-payment note

Banks lend UNsecured, short-term funds in (3) basic ways:

single-payment notes, lines of credit, revolving credit agreements

Financing that arises from the normal course of business

spontaneous liabilities

Paying bills as late as possible without damaging the girl's credit rating

stretching accounts payable

The lender normally uses such a warehouse when the inventory is easily transported and can be delivered to the warehouse relatively inexpensively.

terminal warehouse

a central warehouse that is used to store the merchandise of various customers

terminal warehouse

(2) types of warehousing arrangements are possible under warehouse receipt loans:

terminal warehouse field warehouse arrangement

Line of Credit: the more creditworthy the borrower, ____ the premium(interest increment) above prime, and vice versa

the lower

credit period is

the stated payment date

a secured short-term loan against inventory under which the lender advances 80-100 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

When evaluating inventory as possible loan collateral, the lender looks for items with

very stable market prices that have ready markets and that lack undesirable physical properties

The most common items accrued by a firm are ___ and ___.

wages and taxes

a 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

If the cost of giving up the cash discount is GREATER than the interest rate if you can borrow from bank then

you better take the cash discount kay mas alkanse ka if imong i-give-up makabayad kag mas dako

(3) ADV of factoring accounts receivable:

∆ability it gives the firm to turn accounts receivable immediately into cash without having to worry about repayment ∆it ensures a known pattern of cash flows ∆if factoring is undertaken on a continuing basis, the firm can eliminate its credit and collection departments

2 types of warehousing arrangements:

√ terminal warehouse- central warehouse that is used to store the merchandise of various customers (lender uses this when inventory is easily transferred and inexpensive delivery) √ field warehouse - set up a warehouse on the borrower's premises or to lease part of the borrower's warehouse as collateral

The average payment period has 2 parts:

√ the time from the purchase of raw materials until the firm mails the payment √ payment float time (the time it takes after the firm mails its payment until the supplier has withdrawn spendable funds from the firm's account.)