Describe the relative advantages and disadvantages of different modes of secured short-term financing.

Study and Learn the Words:

English	English equivalents	Romanian	Russian
storage (n)	the cost of keeping goods stored	plată pentru depozitare	плата за хранение
release (v)	to free from	a elibera	освобождать
floor planning	method of financing where the title to merchandise is given to lenders in return for short-term financing
appliance dealer	sellers of devices or machines performing specific esp. those that are worked mechanically or by electricity	vînzător de aparate, dispozitive	торговец приборов
notification plan	to notify the borrower's credit customers to make their payments directly to the lender	plan de avizare	план сообщения
to bedue		a fi achitat	подлежать выплате
to turn over	to hand over, to transfer	a înmâna, a transfera	перепоручать
factor (n)	a firm that specializes in buying other firms' accounts receivable/ agent of sale	factor	агент, комиссионер
face value	the value printed or stamped on a bill	valoare nominală	номинальная стоимость
shift (v)	manage, move	a menaja	управлять
salable (adj)	marketable, that can be sold	comerciale, care pot fi vândute	ходовой, пользующийся спросом
secure (adj)	firm, strong, stable	ferm, stabil	крепкий, стабильный

Financially secure firms prefer to save collateral for long-term borrowing needs. Yet, if a business cannot obtain enough capital via unsecured short-term financing, it must put up collateral to obtain the additional financing it needs. Almost any asset can serve as collateral. However, inventories and accounts receivable are the assets that are most commonly used for short-term financing.

Loans Secured by Inventory Normally, marketing intermediaries and producers have large amounts of money invested in finished goods or merchandise inventories. In addition, producers carry raw materials and work in-process inventories. All three types of inventory may be pledged as collateral for short-term loans. However, lenders prefer the much more salable finished goods to the other inventories.

A lender may insist that inventory used as collateral be stored in a public warehouse. In such a case, the receipt issued by the warehouse is retained by the lender. Without this receipt, the public warehouse will not release the merchandise. The lender releases the warehouse receipt— and the merchandise—to the borrower when the borrowed money is repaid. In addition to the interest on the loan, the borrower must also pay for storage in the public warehouse. As a result, this type of loan is more expensive than an unsecured loan.

A special type of secured financing called floor planning is used by automobile, furniture, and appliance dealers. Floor planningis a method of financing where the title to merchandise is given to lenders in return for short-term financing. The major difference between floor planning and other types of secured short-term financing is that the borrower maintains control of the inventory. As merchandise is sold, the borrower repays the lender a portion of the loan. To ensure that the lender is repaid a portion of the loan when the merchandise is sold, the lender will occasionally check to ensure that the collateral is still in the borrower's possession.

Loans Secured by Receivables Accounts receivableare amounts that are owed to a firm by its customers. They arise primarily from trade credit and are usually due in less than sixty days. It is possible for a firm to pledge its accounts receivable as collateral to obtain short-term financing. A lender may advance 70 to 80 percent of the dollar amount of the receivables. First, however, it conducts a thorough investigation to determine the quality of the receivables. (The quality of the receivables is the credit standing of the firm's customers.) If a favorable determination is made, the loan is approved. Then whenever the borrowing firm collects from a customer whose account has been pledged as collateral, the money must be turned over to the lender as partial repayment of the loan. An alternative approach is to notify the borrower's credit customers to make their payments directly to the lender. This approach, often called the notification plan, may raise questions about the borrowing firm's financial health and cause customers to take their business elsewhere.