Page 196 - Finance for Non-Financial Managers

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Financing the Business
lines, because these lines
enable them to obtain cash
by a borrower to protect
when they need it and to Collateral Assets pledged 177
the interests of the lender
limit their interest expense by guaranteeing the repayment of the
when they don’t. loan.A loan is collateralized or secured
Revolving credit lines by the assets pledged.Typically, the
lender will want the collateral to
are widely used to meet
exceed the amount of the loan, to
temporary working capital
ensure that, in the event of default, it
needs. Such lines provide
has some cushion in disposing of the
easy and flexible borrow- collateral and getting full payment of
ing and allow a company its loan.
to control borrowing costs.
Loans are for working capital purposes and can be used for any
business purpose, as long as the borrowings are protected by
adequate collateral.
Accounts Receivable Loans—Collecting Before You Collect
Companies that don’t have the cash to finance their operations
while waiting for their customers to pay them and companies
that have the cash but want to use it for other purposes may
borrow money from a bank or other lender and pledge their
accounts receivable as collateral for the loan. This is a simpler
variation of the revolving credit line, in that the lender will make
advances up to a certain percentage of eligible receivables, with
the general expectation that the company will repay the line
when it collects the accounts. Terms and conditions vary widely,
including what is eligible, what constitutes a good credit risk,
how quickly advances must be repaid, and so on. Just like the
revolver, advances against receivables enable the company to
retain control of its collection activities and its credit risk (unlike
factoring, discussed below, in which both of control and risk
often—but not always—pass to the lender).
Accounts receivable lending works very much like the
revolver, except that accounts receivable are the only assets
used to calculate how much may be borrowed. Advances are
pretty much limited to 70% to 90% of the value of the eligible