Matt Blogs!

• Revolving. The borrower can continuously borrow and repay up to the credit limit during the life of the loan.

• Clean-up period. Because lines of credit are intended for use as short-term funds, lenders often require that loans be repaid in their entirety for one or two months, called the “clean-up period.” This is to prove that credit lines are not being used as part of the company’s long-term funding.

Other Credit Facilities

Other sources of short-term credit include:

• Commercial paper (CP). A company that has a sufficiently high credit rating can go directly to the money market to issue commercial paper. CP is a promissory note issued for a specific amount for a period ranging from 1 to 270 days. Publicly traded issues are usually rated by the major credit rating agencies; privately placed CP is not. Costs of CP include the broker/dealer fee and the expense for any credit enhancement, such as a standby letter of credit.

• Asset-based financing. When unsecured lending is not feasible, companies have a variety of asset-based borrowing to consider. Usually, the lender will finance only a percentage of the value of the assets. There are two major types of asset-based financing:

  1. Accounts receivable. Accounts receivables may be used for asset-based financing, commonly known as factoring, with or without recourse.

     • With recourse. The lender provides financing on the receivable and collects from the customer. If the customer defaults, the borrowing company is liable for that portion of the loan. The cost is low because the borrower accepts all risk. The factor pays the borrower about 95 percent of the billed price, collects 100 percent, and keeps the difference as a fee for the loan.

     • Without recourse. The lender collects from the customer and accepts the risk of default. The effective cost of the loan is considerably higher because the lender has assumed significantly greater risk.

  2. Inventory financing. Loans are secured by the pledge of inventory. One specialized type of inventory financing is floor planning, which is used to support the inventory of dealers who sell high-ticket durable goods, such as farming equipment and automobiles.

Taken From : Essentials of Managing Corporate Cash