Chapter 9 - McGraw Hill Higher Education
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Chapter 9 Short-term Debt Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 1 Learning Objectives • Overview of the characteristics of various short-term (S-T) debt instruments Different types – Sources (lenders) – Issuing entities (borrowers) – Advantages and disadvantages – • Understand how short-term debt instruments are priced Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 2 Chapter Organisation 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Introduction Trade Credit Intercompany Loans Bank Overdrafts Commercial Bills Calculations Promissory Notes Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 3 Chapter Organisation (cont.) 9.8 9.9 Negotiable Certificates of Deposit Investment Bank Cash Advance Facility 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring 9.11 Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 4 9.1 Introduction • Short-term debt is a financing arrangement for a period of less than one year with various characteristics to suit borrowers particular needs – Timing of repayment, risk, interest rate structures (variable or fixed) and the source of funds • Matching principle – Short-term assets should be funded with shortterm liabilities Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 5 Chapter Organisation 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Introduction Trade Credit Intercompany Loans Bank Overdrafts Commercial Bills Calculations Promissory Notes Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 6 9.2 Trade Credit • A supplier provides goods or services to a purchaser with an arrangement for payment at a later date • Often includes a discount for early payment (e.g. 2/10, n/30 i.e. 2% discount if paid within 10 days, otherwise the full amount is due within 30 days) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 7 9.2 Trade Credit (cont.) • The opportunity cost of the purchaser foregoing the discount on an invoice (1/7, n/30) is % discount 365 100 % discount days difference between early and late settlement 1.0 365 99.0 23 0.160298 or 16.03% p.a. Opportunit y cost Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 8 Chapter Organisation 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Introduction Trade Credit Intercompany Loans Bank Overdrafts Commercial Bills Calculations Promissory Notes Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 9 9.3 Intercompany Loans • Direct borrowing and lending between large, credit-worthy companies • Typically, lenders are insurance and finance companies, and major retailers with shortterm surplus funds • Brokers and merchant banks are used to locate and place funds Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 10 9.3 Intercompany Loans (cont.) • Loans are normally unsecured; thus, the credit risk of the borrower is critical – Credit risk is the risk that a borrower will not make interest and principal repayments when due • Loans are either – Overnight money (11 a.m.) – 24-hour call loans Recallable or renegotiable after 7 days Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 11 Chapter Organisation 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Introduction Trade Credit Intercompany Loans Bank Overdrafts Commercial Bills Calculations Promissory Notes Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 12 9.4 Bank Overdrafts • Major source of short-term finance • Allows a firm to place its cheque (operating) account into deficit, to an agreed limit • Generally operated on a fully fluctuating basis • Lender also imposes an establishment fee, monthly account service fee and a fee on the unused overdraft limit Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 13 9.4 Bank Overdrafts (cont.) • Interest rates negotiated with bank at a margin above an indicator rate—reflecting the borrower’s credit risk Financial performance and future cash flows Length of mismatch between cash inflows and outflows Adequacy of collateral • Indicator rate may be either bank’s prime rate or published market rate Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 14 Chapter Organisation 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Introduction Trade Credit Intercompany Loans Bank Overdrafts Commercial Bills Calculations Promissory Notes Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 15 9.5 Commercial Bills • A bill of exchange is a discount security issued with a face value payable at a future date • A commercial bill is a bill of exchange issued to raise funds for general business purposes • A bank-accepted bill is a bill issued by a corporation that incorporates the name of a bank as acceptor Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 16 9.5 Commercial Bills (cont.) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 17 9.5 Commercial Bills (cont.) • Features of commercial bills—parties involved (bank-accepted bill) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 18 9.5 Commercial Bills (cont.) • Features of commercial bills—parties involved (bank-accepted bill) (cont.) – Drawer – Issuer of the bill Secondary liability for repayment of the bill (after the acceptor) Acceptor Undertakes to repay the face value to the holder of the bill at maturity Acceptor is usually a bank or merchant bank Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 19 9.5 Commercial Bills (cont.) • Features of commercial bills—parties involved (bank-accepted bill) (cont.) – Payee – The party to whom the bill is specified to be paid i.e. the party who receives the funds Usually the drawer, but the drawer could specify some other party as payee Discounter The party that discounts the face value and purchases the bill The provider or lender of the funds May also be the acceptor of the bill Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 20 9.5 Commercial Bills (cont.) • Features of commercial bills—parties involved (bank-accepted bill) (cont.) – Endorser The party that was previously a holder of the bill Signs the reverse side of the bill when selling, or discounting, the bill Order of liability for payment of the bill runs from acceptor to drawer and then to endorser Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 21 9.5 Commercial Bills (cont.) • The flow of funds (bank-accepted bills) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 22 9.5 Commercial Bills (cont.) • The flow of funds (non-bank bills) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 23 9.5 Commercial Bills (cont.) • Establishing a bill financing facility – Borrower approaches bank or merchant bank – Assessment made of borrower’s credit risk – Credit rating of borrower affects size of discount – Maturity usually 30, 60, 90, 120 or 180 days – Minimum face value usually $100,000 Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 24 9.5 Commercial Bills (cont.) • Advantages of commercial bill financing – Lower cost than other short-term borrowing forms (i.e. overdraft, fully-drawn advances) – Borrowing cost (yield) determined at issue date (not affected by subsequent changes in interest rates) – Term of loan may be extended by ‘roll-over’ at maturity Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 25 Chapter Organisation 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Introduction Trade Credit Intercompany Loans Bank Overdrafts Commercial Bills Calculations Promissory Notes Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 26 9.6 Calculations • Calculating price—yield known face value 365 Price yield 365 ( days to maturity) 100 Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger (9.1) 27 9.6 Calculations (cont.) • Calculating price—yield known (cont.) – Example 3: A company decides to fund it short-term inventory needs by issuing a 30-day bank-accepted bill with a face value of $500,000. Having approached two prospective discounters, the company has been quoted yields of 9.52 per cent per annum and 9.48 per cent per annum. Which quote should the company accept, and what amount will the company raise? $500 000 365 $496 118.04 365 (0.0952 30) or $500 000 365 $496 134.23 365 (0.0948 30 Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 28 9.6 Calculations (cont.) • Calculating face value yield 365 ( days to maturity) 100 Face value price[ ] 365 (9.2) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 29 9.6 Calculations (cont.) • Calculating face value (cont.) – Example 4: A company needs to raise additional funding of $500,000 to purchase inventory. The company has decided to raise the funds through the issue of a 60-day bank-accepted bill rollover facility. The bank has agreed to discount the bill at a yield of 8.75 per cent. At what face value will the initial bill be drawn? 365 (0.0875 60) Face value $500 000[ ] 365 $507 191.75 Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 30 9.6 Calculations (cont.) • Calculating yield (sell price - buy price) (days in year 100) Yield buy price days to maturity (9.3) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 31 9.6 Calculations (cont.) • Calculating yield (cont.) – Example 7: In Example 3, a company issued a 30-day bankaccepted bill with a face value of $500,000. The bill was discounted at a yield of 9.48 per cent per annum, representing a price of $496,134.23. After seven days the discounter sells the bill in the short-term money market for $497,057.36. Assume the bill is not traded again in the market, calculate the yield to the original discounter and to the holder at maturity. Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 32 9.6 Calculations (cont.) • Calculating yield (cont.) – Example 7 (cont.) Yield to original discounter: (497 057.36 496 134.23) 36 500 9.70% 496 134.23 7 Yield to holder at maturity: (500 000.00 497 057.36) 36 500 9.39% 497 057.36 23 Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 33 9.6 Calculations (cont.) • Calculating price—discount rate known days to maturity discount rate Price face value [1 ] days in year 100 (9.4) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 34 9.6 Calculations (cont.) • Calculating price—discount rate known (cont.) – Example 8: The price of a 180-day bill, with a face value of $100,000, selling at a discount of 14.75 per cent, would be: 180 0.1475] 365 $100 000(1 - 0.0727) $92 726.03 Price $100 000[1 - The discount in this formula is effectively the rate of return to the buyer of the bill (or the cost of funds to the drawer of the bill), expressed as a percentage per annum, in relation to the face value of the bill. Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 35 9.6 Calculations (cont.) • Calculating discount rate Discount rate face value - current price days in year 100 face value days to maturity (9.5) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 36 9.6 Calculations (cont.) • Calculating discount rate (cont.) – Example 9: A 180-day bill with a face value of $100,000 and selling currently at $92 000, with a full 180 days to run to maturity, has a discount rate of: (100 000 - 92 000 36 500 Discount rate 100 000 180 0.08 202.778 16.22% Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 37 Chapter Organisation 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Introduction Trade Credit Intercompany Loans Bank Overdrafts Commercial Bills Calculations Promissory Notes Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 38 9.7 Promissory Notes • Also called P-notes or commercial paper, they are discount securities, issued in the money market with a face value payable at maturity, sold today by the issuer for less than face value – There is no acceptor or endorser • Typically available to companies with an excellent credit reputation as unsecured Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 39 9.7 Promissory Notes (cont.) • Calculations—use discount securities formulae • Issue programs – – – – Usually arranged by major commercial banks and money market corporations Standardised documentation Revolving facility Most P-notes are issued for 90 days, by Tender, tap issuance and/or dealer bids Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 40 9.7 Promissory Notes (cont.) • Underwritten issues – Underwriting guarantees the full issue of notes is purchased – Underwriter is usually a commercial bank, investment bank or merchant bank – The underwritten issue can incorporate a rollover facility, effectively extending the borrower’s line of credit beyond the short-term life of the Pnote issue • Issues may also be non-underwritten Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 41 Chapter Organisation (cont.) 9.8 9.9 Negotiable Certificates of Deposit Investment Bank Cash Advance Facility 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring 9.11 Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 42 9.8 Negotiable Certificates of Deposit • S-T discount security issued by banks • Maturities range up to 180 days • Issued to international investors in the wholesale money market • The short-term money market has an active secondary market in CDs • Calculations—use discount securities formulae Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 43 Chapter Organisation (cont.) 9.8 9.9 Negotiable Certificates of Deposit Investment Bank Cash Advance Facility 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring 9.11 Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 44 9.9 Investment Bank Cash Advance Facility • Made available to larger corporations • Generally for a term of a number of years but also available S-T • Priced at a margin above a reference rate, reviewable for longer-term loans • Reference rate fixed for S-T loans (up to 180 days) but will be periodically reviewed for longer-term loans Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 45 Chapter Organisation (cont.) 9.8 9.9 Negotiable Certificates of Deposit Investment Bank Cash Advance Facility 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring 9.11 Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 46 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring • Inventory finance – Most common form is ‘floor plan finance’ – Particularly designed for the needs of motor vehicle dealers to finance their inventory of vehicles – Dealer is expected to promote financier’s financial products Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 47 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.) • Accounts receivable finance – A loan to a business secured against its accounts receivable (debtors) – Mainly supplied by finance companies – Lending company takes charge over a company’s accounts receivable; however, the borrowing company is still responsible for the debtor book and bad debts Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 48 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.) • Factoring – Company sells its accounts receivable to a factoring company and in doing so – Converts a future cash flow (receivables) into a current cash flow Factoring provides immediate cash to the vendor; plus, it removes administration costs of accounts receivable Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 49 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.) • Factoring (cont.) – Main providers of factor finance are the finance companies – Factor is responsible for collection of receivables – Notification basis: vendor is required to notify its (accounts receivables) customers that payment is to be made to the factor Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 50 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.) • Factoring (cont.) – Recourse arrangement: factor has a claim against the vendor if a receivable is not paid – Non-recourse arrangement: factor has no claim against vendor company Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 51 Chapter Organisation (cont.) 9.8 9.9 Negotiable Certificates of Deposit Investment Bank Cash Advance Facility 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring 9.11 Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 52 9.11 Summary • Short-term debt is appropriate for funding short• • • • term assets (matching principle) Trade credit—simple and common Intercompany loans—short-term, high credit rating required Bank overdraft—common Discount securities – – – Bill financing—important source of funds Promissory-notes (P-notes)—good credit rating Certificates of deposit (CDs)—issued by banks Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 53 9.11 Summary (cont.) • Investment bank cash advance facility—for larger corporations • Inventory loans, accounts receivable finance and factoring—alternative sources of finance for smaller and medium-sized businesses (SMEs) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 54
