1. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 1 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter 9 Short-term Debt

2. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 2 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Learning Objectives Overview of the characteristics of various short-term (S-T) debt instruments – Different types – Sources (lenders) – Issuing entities (borrowers) – Advantages and disadvantages Understand how short-term debt instruments are priced

3. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 3 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 9.1Introduction 9.2Trade Credit 9.3Intercompany Loans 9.4Bank Overdrafts 9.5Commercial Bills 9.6Calculations 9.7Promissory Notes

4. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 4 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation (cont.) 9.8Negotiable Certificates of Deposit 9.9Investment Bank Cash Advance Facility 9.10Inventory Loans, Accounts Receivable Finance, and Factoring 9.11 Summary

5. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 5 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.1Introduction Short-term debt is a financing arrangement for a period of less than one year with various characteristics to suit borrowers particular needs – Timing of repayment, risk, interest rate structures (variable or fixed) and the source of funds Matching principle – Short-term assets should be funded with short- term liabilities

6. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 6 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 9.1Introduction 9.2Trade Credit 9.3Intercompany Loans 9.4Bank Overdrafts 9.5Commercial Bills 9.6Calculations 9.7Promissory Notes

7. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 7 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.2Trade Credit A supplier provides goods or services to a purchaser with an arrangement for payment at a later date Often includes a discount for early payment (e.g. 2/10, n/30 i.e. 2% discount if paid within 10 days, otherwise the full amount is due within 30 days)

8. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 8 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.2 Trade Credit (cont.) The opportunity cost of the purchaser foregoing the discount on an invoice (1/7, n/30) is

9. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 9 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 9.1Introduction 9.2Trade Credit 9.3Intercompany Loans 9.4Bank Overdrafts 9.5Commercial Bills 9.6Calculations 9.7Promissory Notes

10. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 10 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.3Intercompany Loans Direct borrowing and lending between large, credit-worthy companies Typically, lenders are insurance and finance companies, and major retailers with short- term surplus funds Brokers and merchant banks are used to locate and place funds

11. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 11 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.3 Intercompany Loans (cont.) Loans are normally unsecured; thus, the credit risk of the borrower is critical – Credit risk is the risk that a borrower will not make interest and principal repayments when due Loans are either – Overnight money (11 a.m.) – 24-hour call loans Recallable or renegotiable after 7 days

12. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 12 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 9.1Introduction 9.2Trade Credit 9.3Intercompany Loans 9.4Bank Overdrafts 9.5Commercial Bills 9.6Calculations 9.7Promissory Notes

13. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 13 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.4Bank Overdrafts Major source of short-term finance Allows a firm to place its cheque (operating) account into deficit, to an agreed limit Generally operated on a fully fluctuating basis Lender also imposes an establishment fee, monthly account service fee and a fee on the unused overdraft limit

14. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 14 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.4 Bank Overdrafts (cont.) Interest rates negotiated with bank at a margin above an indicator ratereflecting the borrowers credit risk Financial performance and future cash flows Length of mismatch between cash inflows and outflows Adequacy of collateral Indicator rate may be either banks prime rate or published market rate

15. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 15 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 9.1Introduction 9.2Trade Credit 9.3Intercompany Loans 9.4Bank Overdrafts 9.5Commercial Bills 9.6Calculations 9.7Promissory Notes

16. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 16 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.5Commercial Bills A bill of exchange is a discount security issued with a face value payable at a future date A commercial bill is a bill of exchange issued to raise funds for general business purposes A bank-accepted bill is a bill issued by a corporation that incorporates the name of a bank as acceptor

17. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 17 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.5 Commercial Bills (cont.)

18. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 18 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.5 Commercial Bills (cont.) Features of commercial billsparties involved (bank-accepted bill)

19. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 19 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.5 Commercial Bills (cont.) Features of commercial billsparties involved (bank-accepted bill) (cont.) – Drawer Issuer of the bill Secondary liability for repayment of the bill (after the acceptor) – Acceptor Undertakes to repay the face value to the holder of the bill at maturity Acceptor is usually a bank or merchant bank

20. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 20 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.5 Commercial Bills (cont.) Features of commercial billsparties involved (bank-accepted bill) (cont.) – Payee The party to whom the bill is specified to be paid i.e. the party who receives the funds Usually the drawer, but the drawer could specify some other party as payee – Discounter The party that discounts the face value and purchases the bill The provider or lender of the funds May also be the acceptor of the bill

21. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 21 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.5 Commercial Bills (cont.) Features of commercial billsparties involved (bank-accepted bill) (cont.) – Endorser The party that was previously a holder of the bill Signs the reverse side of the bill when selling, or discounting, the bill Order of liability for payment of the bill runs from acceptor to drawer and then to endorser

22. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 22 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.5 Commercial Bills (cont.) The flow of funds (bank-accepted bills)

23. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 23 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.5 Commercial Bills (cont.) The flow of funds (non-bank bills)

24. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 24 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.5 Commercial Bills (cont.) Establishing a bill financing facility – Borrower approaches bank or merchant bank – Assessment made of borrowers credit risk – Credit rating of borrower affects size of discount – Maturity usually 30, 60, 90, 120 or 180 days – Minimum face value usually $100,000

25. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 25 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.5 Commercial Bills (cont.) Advantages of commercial bill financing – Lower cost than other short-term borrowing forms (i.e. overdraft, fully-drawn advances) – Borrowing cost (yield) determined at issue date (not affected by subsequent changes in interest rates) – Term of loan may be extended by roll-over at maturity

26. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 26 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 9.1Introduction 9.2Trade Credit 9.3Intercompany Loans 9.4Bank Overdrafts 9.5Commercial Bills 9.6Calculations 9.7Promissory Notes

27. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 27 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6Calculations Calculating priceyield known (9.1)

28. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 28 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6 Calculations (cont.) Calculating priceyield known (cont.) – Example 3: A company decides to fund it short-term inventory needs by issuing a 30-day bank-accepted bill with a face value of $500,000. Having approached two prospective discounters, the company has been quoted yields of 9.52 per cent per annum and 9.48 per cent per annum. Which quote should the company accept, and what amount will the company raise?

29. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 29 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6 Calculations (cont.) Calculating face value (9.2)

30. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 30 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6 Calculations (cont.) Calculating face value (cont.) – Example 4: A company needs to raise additional funding of $500,000 to purchase inventory. The company has decided to raise the funds through the issue of a 60-day bank-accepted bill rollover facility. The bank has agreed to discount the bill at a yield of 8.75 per cent. At what face value will the initial bill be drawn?

31. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 31 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6 Calculations (cont.) Calculating yield (9.3)

32. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 32 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6 Calculations (cont.) Calculating yield (cont.) – Example 7: In Example 3, a company issued a 30-day bank- accepted bill with a face value of $500,000. The bill was discounted at a yield of 9.48 per cent per annum, representing a price of $496,134.23. After seven days the discounter sells the bill in the short-term money market for $497,057.36. Assume the bill is not traded again in the market, calculate the yield to the original discounter and to the holder at maturity.

33. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 33 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6 Calculations (cont.) Calculating yield (cont.) – Example 7 (cont.) Yield to original discounter: Yield to holder at maturity:

34. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 34 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6 Calculations (cont.) Calculating pricediscount rate known (9.4)

35. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 35 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6 Calculations (cont.) Calculating pricediscount rate known (cont.) – Example 8: The price of a 180-day bill, with a face value of $100,000, selling at a discount of 14.75 per cent, would be: The discount in this formula is effectively the rate of return to the buyer of the bill (or the cost of funds to the drawer of the bill), expressed as a percentage per annum, in relation to the face value of the bill.

36. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 36 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6 Calculations (cont.) Calculating discount rate (9.5)

37. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 37 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.6 Calculations (cont.) Calculating discount rate (cont.) – Example 9: A 180-day bill with a face value of $100,000 and selling currently at $92 000, with a full 180 days to run to maturity, has a discount rate of:

38. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 38 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 9.1Introduction 9.2Trade Credit 9.3Intercompany Loans 9.4Bank Overdrafts 9.5Commercial Bills 9.6Calculations 9.7Promissory Notes

39. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 39 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.7Promissory Notes Also called P-notes or commercial paper, they are discount securities, issued in the money market with a face value payable at maturity, sold today by the issuer for less than face value – There is no acceptor or endorser Typically available to companies with an excellent credit reputation as unsecured

40. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 40 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.7 Promissory Notes (cont.) Calculationsuse discount securities formulae Issue programs – Usually arranged by major commercial banks and money market corporations – Standardised documentation – Revolving facility – Most P-notes are issued for 90 days, by Tender, tap issuance and/or dealer bids

41. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 41 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.7 Promissory Notes (cont.) Underwritten issues – Underwriting guarantees the full issue of notes is purchased – Underwriter is usually a commercial bank, investment bank or merchant bank – The underwritten issue can incorporate a roll- over facility, effectively extending the borrowers line of credit beyond the short-term life of the P-note issue Issues may also be non-underwritten

42. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 42 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation (cont.) 9.8Negotiable Certificates of Deposit 9.9Investment Bank Cash Advance Facility 9.10Inventory Loans, Accounts Receivable Finance, and Factoring 9.11 Summary

43. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 43 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.8Negotiable Certificates of Deposit S-T discount security issued by banks Maturities range up to 180 days Issued to international investors in the wholesale money market The short-term money market has an active secondary market in CDs Calculationsuse discount securities formulae

44. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 44 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation (cont.) 9.8Negotiable Certificates of Deposit 9.9Investment Bank Cash Advance Facility 9.10Inventory Loans, Accounts Receivable Finance, and Factoring 9.11 Summary

45. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 45 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.9Investment Bank Cash Advance Facility Made available to larger corporations Generally for a term of a number of years but also available S-T Priced at a margin above a reference rate, reviewable for longer-term loans Reference rate fixed for S-T loans (up to 180 days) but will be periodically reviewed for longer-term loans

46. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 46 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation (cont.) 9.8Negotiable Certificates of Deposit 9.9Investment Bank Cash Advance Facility 9.10Inventory Loans, Accounts Receivable Finance, and Factoring 9.11Summary

47. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 47 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring Inventory finance – Most common form is floor plan finance – Particularly designed for the needs of motor vehicle dealers to finance their inventory of vehicles – Dealer is expected to promote financiers financial products

48. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 48 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.) Accounts receivable finance – A loan to a business secured against its accounts receivable (debtors) – Mainly supplied by finance companies – Lending company takes charge over a companys accounts receivable; however, the borrowing company is still responsible for the debtor book and bad debts

49. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 49 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.) Factoring – Company sells its accounts receivable to a factoring company and in doing so Converts a future cash flow (receivables) into a current cash flow – Factoring provides immediate cash to the vendor; plus, it removes administration costs of accounts receivable

50. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 50 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.) Factoring (cont.) – Main providers of factor finance are the finance companies – Factor is responsible for collection of receivables – Notification basis: vendor is required to notify its (accounts receivables) customers that payment is to be made to the factor

51. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 51 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.) Factoring (cont.) – Recourse arrangement: factor has a claim against the vendor if a receivable is not paid – Non-recourse arrangement: factor has no claim against vendor company

52. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 52 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation (cont.) 9.8Negotiable Certificates of Deposit 9.9Investment Bank Cash Advance Facility 9.10Inventory Loans, Accounts Receivable Finance, and Factoring 9.11Summary

53. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 53 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.11 Summary Short-term debt is appropriate for funding short- term assets (matching principle) Trade creditsimple and common Intercompany loansshort-term, high credit rating required Bank overdraftcommon Discount securities – Bill financingimportant source of funds – Promissory-notes (P-notes)good credit rating – Certificates of deposit (CDs)issued by banks

54. Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 54 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 9.11 Summary (cont.) Investment bank cash advance facilityfor larger corporations Inventory loans, accounts receivable finance and factoringalternative sources of finance for smaller and medium-sized businesses (SMEs)