Borrowing
January 19, 2009 – 5:58 amThe cash manager’s responsibilities include ensuring that there are sufficient unused borrowing facilities in place to cover any temporary shortfalls in working capital. These facilities are an essential part of the liquidity management equation.
The need to borrow will be influenced by seasonal factors, the timing of cash flows, and general business conditions. If the cash forecasting of these elements has been accurate, the cash manager will be positioned to make arrangements well in advance and at favorable terms.
In addition to arranging for adequate credit to be available, the cash manager has also to ensure that the terms are not onerous as to restrictions and covenants, and that the cost is reasonable. Just as the cash manager has many options to consider in investing funds, there are a large number of choices for funding. The optimal selection depends on the exact requirements and use of the funds.
Lines of Credit
The most important form of borrowing facility is a bank line of credit. The borrower has access to a defined amount of money over a specific period of time. The cost of a credit line depends on a number of factors, primarily the bank’s assessment of the company’s financial health and the overall level of interest rates.
The characteristics of a line of credit are:
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Unsecured or secured. In order to reduce assessed risk and, consequently, the cost of a line of credit, the lender might require some form of collateral, such as a company’s accounts receivable. Unsecured lines are uncollateralized and are, therefore, more expensive.
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Committed or uncommitted. With a committed line of credit, the lender is obligated to make the funds available upon demand as long as the borrower meets all the conditions and terms of the agreement. An uncommitted line is a less formal agreement, with the lender under no obligation to make funds available when requested. Uncommitted lines are best used for occasional needs and for very short periods when other sources of funding are also available. An uncommitted line will be less expensive than a committed one, which will often include a commitment fee payable whether the line is used or not.
Taken From : Essentials of Managing Corporate Cash
