18-0 Short-Term Borrowing 18.6 Operating Loans Committed vs. non-committed Letter of credit Accounts receivable financing Covenants Factoring Securitizing.

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18-0 Short-Term Borrowing 18.6 Operating Loans Committed vs. non-committed Letter of credit Accounts receivable financing Covenants Factoring Securitizing Receivables Inventory Loans Trade Credit Money Market Financing LO5

18-1 Example: Compensating Balance We have a $500,000 operating loan with a 15% compensating balance requirement. The quoted interest rate is 9%. We need to borrow $150,000 for inventory for one year. How much do we need to borrow? 150,000/(1-.15) = 176,471 What interest rate are we effectively paying? Interest paid = 176,471(.09) = 15,882 Effective rate = 15,882/150,000 =.1059 or 10.59% LO5

18-2 Example: Factoring Last year your company had average accounts receivable of $2 million. Credit sales were $24 million. You factor receivables by discounting them 2%. What is the effective rate of interest? Receivables turnover = 24/2 = 12 times Average collection period = 365/12 = 30.4 days APR = 12(.02/.98) =.2449 or 24.49% EAR = (1+.02/.98) 12 – 1 =.2743 or 27.43% LO5