Working Capital Financing^373
responsible for protecting the security interests of the lender. This arrangement is
particularly useful where large bulky items are used as collateral. For example, a refinery
might use a part of its inventory of fuel oil to secure a short-term bank loan. Under a
warehousing agreement the oil reserves would be set aside in specific tanks or storage
vessels, which would be controlled (monitored) by a field warehousing concern.
The warehousing concern, upon receipt of the inventory, takes full control of the collateral.
This means that the borrower is no longer allowed to use or sell the inventory items
without the consent of the lender. The warehousing firm issues a warehouse receipt for
the merchandise, which carries title to the goods, represented therein. The receipt may
be negotiable, in which case title can be transferred through sale of the receipt, or
nonnegotiable, whereby title remains with the lender. With a negotiable receipt
arrangement the warehouse concern will release the goods to whoever holds the receipt,
whereas with a nonnegotiable receipt the goods may be released only on the written
consent of the lender.
The cost of such a loan can be quite high, since the services of the field warehouse
company must be paid for by the borrower.
Example: The M.M. Company follows a practice of obtaining short-term credit based
on its seasonal finished goods inventory. The firm builds up its inventories of outdoor
furniture throughout the winter months for sale in spring the summer. Thus, for the two-
month period ended March 31, it uses its fall and winter production of furniture as
collateral for a short-term bank loan. The bank lends the company up to 70 per cent of
the value of the inventory at 14 per cent interest plus a fixed fee of Rs 2000 to cover the
costs of a field warehousing arrangement. During this period the firm usually has about
Rs 200,000 in inventories, which it borrows against. The annual effective cost of the
short-term credit is therefore.
22.57 per cent
60/3601
Rs 140.000RATE = Rs^3267 +^ Rs^2000 ¥ =where the financing cost consists of two monthís interest Rs 140,000◊.14◊ 60/360 = Rs
3267) plus the field warehousing fee of Rs 2000.
Terminal Warehouse Agreements
The terminal warehouse agreement differs from the field warehouse agreement just
discussed in only one respect. Here the inventories pledged as collateral are transported
to a public warehouse that is physically removed from the borrowerís premises. An
added degree of safety or security is provided to the lender, as the inventory is totally
removed from the borrowerís control. Once again the cost of this type of arrangement