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Chapter 8

Chapter 8. Sources of Short-Term Financing. Chapter 8 - Outline LT 8-1. Sources of Short-Term Financing Trade Credit Net Credit Position Bank Credit Terminology Types of Bank Loans Corporate and Foreign Borrowing Terminology Accounts Receivable Financing.

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Chapter 8

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  1. Chapter 8 Sources of Short-TermFinancing

  2. Chapter 8 - Outline LT 8-1 • Sources of Short-Term Financing • Trade Credit • Net Credit Position • Bank Credit Terminology • Types of Bank Loans • Corporate and Foreign Borrowing Terminology • Accounts Receivable Financing

  3. Sources of Short-Term Financing LT 8-2 There are various sources of short-term funds available to a firm: – Trade Credit from Suppliers – Bank Loans – Corporate Promissory Notes – Foreign Borrowing – Loans Against Receivables and Inventory

  4. Trade Credit LT 8-3 • The largest source of short-term financing for a firm • It is usually a 30-60 day grace period before a bill is due • A cash discount is often given if payment is made within a specified time – Ex., 2/10 net 30 means a 2% discount is given if paid in 10 days; if not, the full amount is due in 30 days

  5. Net Credit Position LT 8-4 Net Credit Position: – a firm’s Accounts Receivable (A/R) minus its Accounts Payable (A/P) – if A/R is greater than A/P, it is a net provider of trade credit (positive number) – if A/P is greater than A/R, it is a net user of trade credit (negative number) – larger firms tend to be net providers of trade credit, while smaller firms are net users

  6. Bank Credit Terminology LT 8-5 Prime Rate: – the interest rate charged to a bank’s best customers – acts as a benchmark for calculating other interest rates Compensating Balance: – when a bank requires a minimum average account balance for business customers in order to qualify for a loan – can be thought of as a form of collateral Effective Interest Rate: – the actual interest rate or “true” cost of a loan – also known as the annual percentage rate (APR)

  7. Types of Bank Loans LT 8-6 Discounted Loan: – when a bank deducts the interest on the loan in advance and lends the balance Installment Loan: – calls for a series of equal payments over the life of the loan – ex., most car loans and home mortgages Compensating Balance Loan: – when a compensating balance is required as part of the loan

  8. Corporate and Foreign Borrowing TerminologyLT 8-7 Commercial Paper: – a short-term unsecured promissory note issued to the public in minimum units of $25,000 – total amount of commercial paper outstanding has increased greatly in recent years Eurodollar: – a U.S. dollar held or deposited in a foreign bank – loans from foreign banks denominated in American dollars are called Eurodollar loans

  9. Examples • Chevron -http://www.chevron.com/investor/commercial_paper/ • LaSalle Bank program brochure http://www.lnccp.com/LBC_ComPaper_InstInvest_3A3Prog.pdf

  10. Accounts Receivable Financing LT 8-8 • A/R financing includes 2 choices: – pledging accounts receivable as collateral for a loan OR – an outright sale (also called factoring) of receivables to a bank or finance company • Tends to be a relatively expensive source of financing

  11. Inventory Financing • Collateral value • Marketability • Price stability • Perishability • Physical control

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