MGMT 1 Lecture Notes - Lecture 36: Merage Family, Revolving Credit, Secured Loan
Paul Merage School of Business
MGMT 1
Intro to Business Management
4 units
No Pre-reqs
Course code: 38001
tuesday/thursdays 9:30-10:50
Location:SB1 1200
Final: Thursday of finals week
Course Notes
❖ 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.
➢ 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.
➢ 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.
➢ 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.
➢ 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
➢ Factoring – a relatively expensive source of short-term funds which is the
process of selling accounts receivable for cash.
