MGMT 1 Lecture Notes - Lecture 34: Revolving Credit, Accounts Receivable, Secured Loan
Paul Merage School of Business
MGMT 1
Intro to Business Management
4 units
No Pre-reqs
Course Notes
● Different Forms of Short-Term Loans
o Secured loan – a loan backed by collateral, something valuable such as property.
▪ If the borrower fails to pay the loan, the lender may take possession of the
collateral.
▪ Collateral removes some of the bank’s risk in lending the money.
▪ Pledging – accounts receivables used as collateral for a loan.
● A percentage of the value of a firm’s accounts receivable pledged
is advanced to the borrowing firm.
● As customers pay off their accounts, funds received are forwarded
to the lender in repayment of the funds that were advanced.
o Unsecured loans – a loan that doesn’t require any collateral.
▪ Usually only given to highly regarded customers – long-standing
businesses or those considered financially stable.
o Line of credit – a given amount of unsecured short-term funds a bank will lend to
business, provide the funds are readily available.
▪ Done if a business develops a strong relationship with a bank.
▪ Not guaranteed to a business, but speeds up the borrowing process since a
firm does not have to apply for a new loan every time it needs funds.
▪ As businesses mature and become more financially secure, banks will
often increase their line of credit, and offer a revolving credit agreement.
o Revolving credit agreement - a line of credit that’s guaranteed but usually with a
fee.
▪ Both of lines of credit and revolving credit agreements are particularly
good sources of funds for unexpected cash funds.
o Commercial finance companies – organizations that make short-term loans to
borrowers who offer tangible assets as collateral.
▪ Businesses turn to these when they are unable to secure a short-term loan
from a bank.
▪ These companies assume higher degrees of risk than commercial banks,
and usually charger higher interest rates.
● Factoring Accounts Receivable
o Factoring – a relatively expensive source of short-term funds which is the
process of selling accounts receivable for cash.
o If some buyers may be slow in paying their bills, so a large amount is due to the
firm.
o Factor – a market intermediary (usually a financial institution or a commercial
bank) that agrees to buy the firm’s account receivable, at a discount, for cash.