LT 8-1
 Sources of Short-Term Financing
 Trade Credit
 Net Credit Position
 Bank Credit Terminology
 Types of Bank Loans
 Corporate and Foreign Borrowing Terminology
 Accounts Receivable Financing
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

LT 8-2
There are various sources of short-term funds available to a firm:
– Trade Credit from Suppliers
– Bank Loans
– Corporate Promissory Notes
– Foreign Borrowing
– Loans Against Receivables and Inventory
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

LT 8-3
 The largest source of short-term financing for a firm
 It is usually a 30-60 day grace period before a bill is due
 A cash discount is often given if payment is made within a specified time
– Ex., 2/10 net 30 means a 2% discount is given if paid in 10 days; if not, the full amount is due in 30 days
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

LT 8-4
Net Credit Position:
– a firm’s Accounts Receivable (A/R) minus its
Accounts Payable (A/P)
– if A/R is greater than A/P, it is a net provider of trade credit (positive number)
– if A/P is greater than A/R, it is a net user of trade credit (negative number)
– larger firms tend to be net providers of trade credit, while smaller firms are net users
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

LT 8-5
Prime Rate:
– the interest rate charged to a bank’s best customers
– acts as a benchmark for calculating other interest rates
Compensating Balance:
– when a bank requires a minimum average account balance for business customers in order to qualify for a loan
– can be thought of as a form of collateral
Effective Interest Rate:
– the actual interest rate or “true” cost of a loan
– also known as the annual percentage rate (APR)
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

LT 8-6
Discounted Loan:
– when a bank deducts the interest on the loan in advance and lends the balance
Installment Loan:
– calls for a series of equal payments over the life of the loan
– ex., most car loans and home mortgages
Compensating Balance Loan:
– when a compensating balance is required as part of the loan
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

LT 8-7
Commercial Paper:
– a short-term unsecured promissory note issued to the public in minimum units of $25,000
– total amount of commercial paper outstanding has increased greatly in recent years
Eurodollar:
– a U.S. dollar held or deposited in a foreign bank
– loans from foreign banks denominated in American dollars are called Eurodollar loans
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Chevron http://www.chevron.com/investor/commercial_paper/
 LaSalle Bank program brochure http://www.lnccp.com/LBC_ComPaper_InstInvest_3A3Pr og.pdf
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

LT 8-8
 A/R financing includes 2 choices:
– pledging accounts receivable as collateral for a loan
OR
– an outright sale (also called factoring) of receivables to a bank or finance company
 Tends to be a relatively expensive source of financing
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Collateral value
 Marketability
 Price stability
 Perishability
 Physical control
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.