Principles of Managerial Finance

658 PART 5 Short-Term Financial Decisions

658 PART 3 Long-Term Financial Decisions

TABLE 15.2

Summary of Key Features of Common Sources of Short-Term Financing (continued)

Type ofshort-term financing

Source

Cost or conditions

Characteristics

III. Secured sources of short-term loansAccounts receivable collateral

(1) Pledging

Commercial banks

2% to 5% above prime plus up to 3% in fees.

Selected accounts receivable are used as collateral.

and commercial

Advance 50% to 90% of collateral value.

The borrower is trusted to remit to the lender on

finance companies

collection of pledged accounts. Done on a non-notification basis.

(2) Factoring

Factors,

1% to 3% discount from face value of factored

Selected accounts are sold—generally without

commercial banks,

accounts. Interest of 2% to 4% above prime

recourse—at a discount. All credit risks go with the

and commercial

levied on advances. Interest between 0.2% and

accounts. Factor will lend (make advances) against

finance companies

0.5% per month earned on surplus balances left

uncollected accounts that are not yet due. Factor will

with factor.

also pay interest on surplus balances. Typicallydone on a notification basis.

Inventory collateral

(1) Floating liens

Commercial banks

3% to 5% above prime. Advance less than 50% of

A loan against inventory in general. Made whe

n

and commercial

collateral value.

firm has stable inventory of a variety of inexpensive

finance companies

items.

(2) Trust receipts

Manufacturers’

2% or more above prime. Advance 80% to 100%

Loan against relatively expensive automotive,

captive financing

of cost of collateral.

consumer durable, and industrial goods that can be

subsidiaries,

identified by serial number. Collateral remains in

commercial banks,

possession of borrower, who is trusted to remit

and commercial

proceeds to lender upon its sale.

finance companies

(3) Warehouse receipts

Commercial banks

3% to 5% above prime plus a 1% to 3% warehouse

Inventory used as collateral is placed un

der control

and commercial

fee. Advance 75% to 90% of collateral value.

of the lender either through a terminal warehouse or

finance companies

through a field warehouse. A third party—a ware-housing company—guards the inventory for thelender. Inventory is released only on written approval of the lender.