2 pages/≈550 words
Business & Marketing
Managerial Finance (Essay Sample)
For the following methods of using inventory as short-term loan collateral, describe the basic features of each and compare their use: a) floating lien b) trust receipt loan and c) warehouse receipt loan. Which might be most risky for the lender?source..
Inventory financing can be utilized where there is a high possibility of marketing inventories and no risk of obsolescence is present. The inventory acts as security within the financing arrangement. Financing can take place for up to 70% of the total value of the inventory values offered given that inventory prices remain stable. The cost of financing inventory can be relatively high at times six times above the prime lending rate. There are three types of financing arrangements, namely floating liens, warehouse receipts, and trust receipts with each one of them have its unique features (McCormack, 2004).
The floating lien is a legal claim that is attached on a set of assets instead of on an individual asset. This type of arrangement is utilized when the lesser components of the general asset are susceptible to change in the long term. An example of this is the outstanding balance that is attached in an organization’s accounts receivable. If a lending organization makes a loan secured through the use of a floating lien gets an interest in the set of company assets at the exact moment when the lien is placed as well as an accumulations to that asset set over the entire period of the credit period. A floating lien is ideal for placement in an organization’s inventory since the inventory is likely to increase over time thus allowing the floating lien to cover the extra acquisitions. In the event that the company defaults on the loan payment, the value of the lien is transformed into a fixed charge something that gives the lender precedence as a creditor (McCormack, 2004).
On its part, trust receipt is a form of short-term import loan to offer financing to buyers to settle imported goods where the title to the goods is in possession of the bank. Under the trust receipt agreement, the bank is left with title to the goods while the buyer is allowed to sell the goods and pay the bank after the goods have been sold at a later date. This kind of financing is only applicable to good that have been procured under documentary credit. Under this type of arrangement, the buyer does not need to have any money at the time when documents are presented under documentary credit, documentary credit or even open account. This form of arrangement is ideal since it allows the buyer to have working capital that they can use for other purposes to generate money (McCormack, 2004).
Warehouse receipt loan is a form of financing where traders are offered financing for goods that have been kept in a warehouse. Under this kind of arrangement, a warehouse that has been appointed by the bank stores the products while the trader negotiates a better price for the goods. During this process, the warehouse issues a receipt stating the quantity and quality of the products. The bank uses the receipt issued by the warehouse to offer financing to the trader (McCorma...
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