Beruflich Dokumente
Kultur Dokumente
Chapter 8 - Outline
y Sources of Short-Term Financing y Trade Credit y Net Credit Position y Bank Credit Terminology y Types of Bank Loans y Corporate and Foreign Borrowing Terminology y Accounts Receivable Financing
Trade Credit
y The largest source of short-term financing for a firm. Approximately 40
y It is usually a 30-60 day grace period before a bill is due y 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
Net-Credit Position
y Determined by examining the difference between accounts
and vice versa y Larger firms tend to be net providers of trade credit (relatively high receivables) y Smaller firms in the relatively user position (relatively high payables)
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
Installment Loan:
calls for a series of equal payments over the life of the loan ex., most car loans and home mortgages
For Discounted Loan subtract Interest from Principal (or int. % from 1) when computing denominator. For Compensating Balance Loan:
Subtract Compensating Balance from Principal (or % CB from 1) when computing denominator.
If discounted loan with compensating balance, then subtract interest plus compensating balance (or % and
CB%).
For Installment Loan, the approximation for annualizing is: 2 x Annual # of payments / Total number of payments + 1 (instead of x 360 / days loan is outstanding note that all annualizing shown ignores compounding of interest)
Eurodollar:
a U.S. dollar held or deposited in a foreign bank loans from foreign banks denominated in American dollars are called Eurodollar loans
market
Many lenders have become risk-averse post a multitude of bankruptcies Firms with downgraded credit rating do not have access to this market The funds generation associated with this is less predictable Lacks the degree of commitment and loyalty associated with bank loans
pledging accounts receivable as collateral for a loan OR an outright sale (also called factoring) of receivables to a bank or finance company
y Tends to be a relatively expensive source of financing
receivables y Massive withdrawals of savings deposits at banking and thrift institutions, fuelled by the search for higher returns
due to:
y Unexpected defaults y Economic recessions y Changes in monetary policy y Other economic setbacks