ACCT10001 Chapter Notes - Chapter 13: Overdraft, Trade Credit, Discount Window
22 May 2018
School
Department
Course
Professor
Spontaneous sources of finance
○
Accrued wages and taxes
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Most important source of short
-
term finance for entities
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Such credit arises during normal course of business
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Normally extended without formal agreements
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Normally unsecured
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Requires nothing additional to normal accounting practices for its successful
management
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Most likely offered on a net 30
-
days basis
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full amount of invoice must be paid within 30
days
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Creditors turnover = average trade creditors x 365 / credit purchases = x days
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Trade credit
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Overdraft = loan facility attached to a current (cheque) account
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Loan is drawn down only as required, when cheques exceed positive balances
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Intention is that balance will fluctuate between positive and negative as cash flows into
and out of the entity
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Bank overdrafts
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Discount securities
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borrower receives funds less than face value
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Difference between funds received by borrower and funds eventually repaid represents
interest and fees
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PV = FV / (1 + i)
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Borrower wanting to access the bill market approaches the bank and makes a
request
Bank draws up a bill and then finds an investor to fund the loan
Bank accepts the bill, guarantees it will be honoured at maturity
Bank assumes credit risk on bill in return for a fee
3 parties to the issue of a bank
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accepted commercial bill (BAB)
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entity (borrower),
investor (discounter), bank (acceptor)
○
Borrower is only party responsible for repayment
Tends to be restricted to larger entities with good reputations and excellent credit
ratings
Promissory notes are similar to BABs but not endorsed by an acceptor
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Commercial bills and promissory notes
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Use of accounts receivable as security
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Factoring gives lender the right to collect cash owing on invoices
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Factor discounts the invoices and hands over the cash
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Collects amounts owing by borrowing entity's customers
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Sometimes factor buys the invoices outright as well as the right to collect the funds
owing; other times, the factor gives a loan, collects the outstanding amounts, subtracts
fees and loan amount and returns balance to borrower
○
Suitable for entities that have rapid sales growth, unable to fund large orders or
seasonal peaks and regularly exceed current overdraft limits and are fully borrowed
against fixed assets
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Not suitable for entities with disproportionate levels of trade disputes or retailers with
their myriad small sales
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Factoring or debtor/invoice/trade finance
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Quality of inventory as a security depends on its nature
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quality, age, perishability,
marketability
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Most common is floor
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plan finance
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3 parties
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lender, manufacturer, borrower (retail dealer)
Inventory loans or floor
-
plan finance
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Most common sources of short
-
term finance:
Sources of short
-
term finance
Saturday, 25 March 2017 9:01 PM
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3 parties
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lender, manufacturer, borrower (retail dealer)
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Initial contracts outline each party's responsibilities
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Dealer places an order with the manufacture
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Manufacture contacts lender to see if dealer's credit for that amount is good
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Order is filled
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dealer gets inventory, lender receives invoice to pay
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Dealer pays interest on a monthly basis to lender and has an obligation to repay
principal as soon as the inventory is sold
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ARA Page 2
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