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(^372) Financial Management
company gets specialised service in credit management which helps it save costs in
credit administration as also helps the company concentrate on other areas of operations.
Inventory Loans
Inventory loans provide a second source of security for short-term secured credit. The
amount of the loan that can be obtained depends on both the marketability and perishability
of the inventory. Some items, such as raw materials (geains, oil, lumber, and chemicals),
serve as excellent sources of collateral, since they can easily be liquidated. Other items,
such as work-in-process inventories, provide very poor collateral, owing to their lack of
marketability.
There are several methods by which inventory can be used to secure short-term
financing. These include a floating or blanket lien, chattel mortgage, field warehouse
receipt, and terminal warehouse receipt.
Floating Lien Agreement
Under a floating lien agreement the borrower gives the lender a lien against all his
inventories. This provides the simplest but least secure form of inventory collateral.
The borrowing firm maintains full control of the inventories and continues to sell and
replace them as it sees fit. Obviously, this total lack of control over the collateral greatly
dilutes the value of this type of security to the lender. Correspondingly, loans made with
floating liens on inventory as collateral are generally limited to a relatively modest fraction
of the value of the inventories covered by the lien. In addition, floating liens usually
include future as well as existing inventories.
Chattee Mortgage Agreements
The lender can increase his security interest by having specific items of inventory
identified (by serial number or otherwise) in the security agreement. Such an arrangement
is provided by a chattel mortgage. The borrower retains title of the inventory but cannot
sell the items without the lenderís consent. This type of agreement is very costly to
implement, as specific items of inventory must be identified; thus, it is used only for
major items of inventory such as machine tools or other capital asset.
Field Warehouse Financing Agreements
Increased lender control over inventories used as loan collateral can be obtained through
the use of a field warehouse agreement. Here the inventories used as collateral are
physically separated from the firmís other inventories and placed under the control of a
third-party field warehousing firm. Note that the inventories are not removed from the
borrowerís premises, but they are placed under the control of a third party who is