Introduction to Corporate Finance

ONLINE CHAPTERS

In Australia, there is an extensive commercial bill market to enable companies to borrow funds for

short terms from the general money market. The market was established by the Commonwealth Bills

of Exchange Act 1909. Commercial bills, like overdrafts, allow companies to borrow in the short term

without having to specify the particular purpose for the funds. Commercial bills are categorised into

bank-accepted bills, bank-endorsed bills and non-bank bills.

A commercial bill is called a bank-accepted bill when a bank puts its name on the face of the bill,

thereby increasing the bill’s creditworthiness. This should lower the cost of borrowing for the bill issuer,

since the entity that buys the bill (lends the money sought by the bill) now knows both that a bank is

confirming that the borrower has the funds to pay the bill when it comes due (matures) and that the loan

has to be repaid.

Bank-endorsed bills are those in which the bank confirms that it is willing to pay the face value of the

bill at maturity even if the borrower defaults. This occurs when the bank sells the bill on to an investor.

Bill financing has several advantages over other forms of business finance. The bills may be cheaper

funding than an overdraft or term loan from a bank, because a bank does not have to fund the bill on

its balance sheet. A bank can accept a bill issued by a company and make some income from charging

a fee for this service. The bank can then sell on the bill to an investor, thereby making a margin on the

sale of the bill.

The issuer of the bill has certainty about the amount to repay and the interest rate on the borrowing,

for the life of the bill. Most commercial bills have maturities ranging up to 180 days, for which the

conditions are fixed; but many bills can also be rolled over into another borrowing period, thereby

lowering the cost of renewal. The interest rate on the renewal period may differ from that of the original

borrowing period; but this exposure is normal market risk.

Companies can also establish a ‘bill line’ with a bank, to enable them to draw on the facility as

required to issue bills as funds are required. This combines the concept of an overdraft and a commercial

bill facility, and usually lowers the overall cost of fund raising because of reduced issuance costs.

bank-accepted bill
A commercial bill on which
a bank places its name
together with that of the issuer
of the bill, to indicate the
borrower has sufficient funds
to repay the borrowing

bank-endorsed bill
A commercial bill in which a
bank has signed that it will
pay the funds at maturity to
any investor to whom it has
sold the bill once issued by the
original borrower

12 What are the basic motives for holding cash and short-term investments? Why are providing

liquidity and preserving principal the primary concerns in choosing short-term investments?

13 What are the key base rates used in variable rate short-term borrowing, and how do they factor into

the all-in rate? What other charges might be applicable to short-term borrowing? What effect do

they have on the effective borrowing rate (EBR)?

CONCEPT REVIEW QUESTIONS 19-4

SUMMARY

■ The cash manager’s job is to manage cash

flow related to collection, concentration

and disbursement of the company’s funds.

Float can be viewed from the perspective of

either the receiving party or the paying party.

Mail float and processing float are viewed

the same from both perspectives. The third

float component is availability float (to the

receiving party) and the fourth is clearing

float (to the paying party). The receiving

party’s goal is to minimise collection float,

whereas the paying party’s goal is to

maximise disbursement float.

LO19.1