Exam 16: Short-Term Business Financing

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it must execute an assignment of these accounts to the bank.

When accounts receivable are pledged: money is advanced to the borrower as a loan against accounts receivable; accounts receivable balances remain on the balance sheet; the customer payment is made to the firm, which then submits the payment to the bank; and interest is charged on the loan.

Ningbo Steel was extended credit terms of 3/15 net 30. If the firm were able to stretch its accounts payable to 60 days without damaging its credit rating, the cost of giving up the cash discount would only be

Assume that Ningbo Steel borrows $2,000,000 for one year under a line of credit with a stated interest rate of 9.5 percent and a 10 percent compensating balance and that the firm keeps no money on deposit in its checking account. Based on this information, the effective annual interest rate on the loan is

In general, a firm that secures a bank line of credit pays interest on:

If a firm actually sells its accounts receivable, the process is known as:

Cash, marketable securities, accounts receivable, and inventories.

A trust receipt is a claim against a customer's inventory when the individual items are indistinguishable.

An advantage of short-term borrowing is the need for frequent renewals.

The factoring of receivables:

Using aggressive approach for financing a firm's assets, long term financing would be used only to finance fixed assets, while short term financing would be used to finance current assets including seasonal fluctuations.

When a loan is discounted, to receive the desired usable funds, the loan request must equal Desired usable funds x (1 - Discount).

With a trust receipt lean, the bank retains ownership of the goods until they are sold in the regular course of business.

If a firm chooses to take a cash discount, it should

Where a firm obtains a short-term loan by using accounts receivable as collateral.

A field warehouse is a warehouse on the grounds of the borrowing business establishment.

A compensating balance requirement means that a lending institution will require a borrowing company to keep a certain percentage of the loaned amount on deposit with that institution.

If a firm has positive net working capital, the current ratio is:

Large U.S. corporations of high credit quality can issue or sell short-term promissory notes called:

A firm's choice of financing strategy depends on a number of factors including its operating characteristics, cost, flexibility, and the ease of obtaining future financing.