SECURED SOURCES

OF SHORT-TERM
LOANS

Gea Eloisa S. Mora

Presenter
 SECURED SOURCES OF SHORT-TERM
LOANS

Secured short-term financing – is short term financing (loan) that has

specific assets pledged as collateral.
• The collateral commonly takes the form of an asset, such as accounts
receivable or inventory.

Security agreement – is the agreement between the borrower and the

lender that specifies the collateral held against a secured loan.
 C O L L AT E R A L A N D T E R M S

PERCENTAGE ADVANCE – is the percentage of the book value

of the collateral that consti tutes the principal of a secured
loan.

I N S T I T U T I O N S E X T E N D I N G S E C U R E S H O RT- T E R M L O A N S

COMMERCIAL FINANCE COMPANIES– are lending insti tuti ons

that make only secure loans – both short-term and long-term
to businesses.
 USE OF ACCOUNTS RECEIVABLE AS COLLATERAL
RECEIVABLE FINANCING is the financial flexibility or capability of an entity to
raise money out of its receivables.

“ENTITY/BUSSINESS” “BANK/FINANCE ENTITY”

ASH
C
 USE OF ACCOUNTS RECEIVABLE AS COLLATERAL

COMMONLY USED MEANS OF OBTAINING SHORT-TERM

FINANCING WITH ACCOUNTS RECEIVABLE

PLEDGING ACCOUNTS RECEIVABLE

FACTORING ACCOUNTS RECEIVABLE

PLEDGING ACCOUNTS RECEIVABLE

A pledge of accounts receivable is often used

to secure a short-term loan because accounts
receivable are normally quite liquid, and they
are attractive form of short –term loan
collateral.

Pledging is general because all accounts

receivable serve as collateral of the loan.
 METHODS IN PLEDGING ACCOUNTS
R E C E I VA B L E
1) The Pledging Process – The lender first evaluate the firms
accounts receivable to determine their desirability as collateral.

2) Notification
• Non-notification basis – The basis on which a borrower, having
pledge an account receivable, continues to collect the account
payment without notifying he account customer.
• Notification basis - The basis in which an account customer
whose account has been pledge is notified to remit the payment
directly to the lender.

3) Pledging Cost – pledge of accounts receivable is normally 2 to 5

percent above the prime rate.
 PLEDGING ACCOUNTS RECEIVABLE

“ENTITY/BUSSINESS” “BANK/FINANCE ENTITY”

CASH
o ns
o l l ecti
C

PLEDGE OF A/R
• non-notification basis
 FACTORING ACCOUNTS
RECEIVABLE

Factoring of accounts receivable is the

outright sale of accounts receivable at a
discount to a factor or another financial
institution.

Factor – is a financial institution that

specializes in purchasing accounts receivable
from businesses.
 M E T H O D S I N FA C TO R I N G A C C O U N T S
R E C E I VA B L E
FACTORING AGREEMENT – Normally states the exact
conditions and procedures for the purchase of the
account.
• Nonrecourse basis – the factor agrees to accept all
credit risks.

FACTORING COST – includes commissions, interest levied

on the advances, and interest earned on surpluses.
 FACTORING ACCOUNTS RECEIVABLE
FACTOR
“ENTITY/BUSSINESS” “BANK/FINANCE ENTITY”

CASH

Factoring A/R

- Without recourse
- Notification basis
 USE OF INVENTORY AS C OLL AT ERAL

INVENTORY is generally second to accounts receivable in desirability as short-

term loan collateral.

• Factors influencing the use of inventory:

- Marketability of the pledge goods
- Associated price stability
- Perishability of the product
- Degree of physical control that the lender can exercise over the product
 USE OF INVENTORY AS C OLL AT ERAL

• Provides greater assurance to the lender but higher administrative

costs
FLOATING INVENTORY LIENS – is a secured short-term loan against inventory
under which the lender’s claim is on the borrower’s inventory in general.

The interest charge is 3 to 5 percent above the prime rate

TRUST RECEIPT INVENTORY LOANS – is a secured short-term loan against

inventory under which the lender advance 80 to 100 percent of the cost of the
borrower’s relatively expensive inventory items in exchange for the borrower’s
promise to repay the lender, with accrued interest, immediately after the sale of
the item of collateral.

-The interest charge to the borrower is normally 2 percent or more above prime
rate.
 USE OF INVENTORY AS C OLL AT ERAL

WAREHOUSE RECEIPT LOANS – is a secured short-term loan against

inventory under which the lender receives control of the pledged
inventory collateral, which is stored by a designated warehousing company
on the lender’s behalf.

-The interest charged is generally ranging from 3- percent above the prime
rate
TWO (2) TYPES OF WAREHOUSING ARRANGEMENT
1) TERMINAL WAREHOUSE

2) FIELD WAREHOUSE
 T YPE S OF WAR EHOUSING AR R ANGEMENT

TERMINAL WAREHOUSE - Is a central warehouse that is used to store the

merchandise of various customers.

FIELD WAREHOUSE ARRANGEMENT - the lender hires a field-

warehousing company to set up a warehouse on the borrower’s
premises or to lease part of the barrower’s warehouse to store the
pledged collateral.
THANK YOU!!!