16 Questions
Commercial paper is an ______ debt that is issued by a company and has a fixed maturity ranging from 1 to 270 days.
unsecured
A company can sell its commercial paper directly to ______, such as money market funds, or through a dealer in exchange for a small commission.
investors
Factoring is a financial transaction in which a company sells its ______ to a finance company that specializes in buying receivables at a discount.
accounts receivable
Field Warehouse Financing uses a company's ______ as collateral for a loan.
inventory
The inventory to be used as collateral is segregated from the rest of the ______ by a fence.
inventory
Floor Planning is a method of financing ______ purchases, where a lender pays for assets that have been ordered by a distributor or retailer.
inventory
The arrangement of Floor Planning is most commonly used when large ______, such as automobiles or household appliances, are involved.
assets
In Floor Planning, the entity at ______ in this arrangement is the lender, which is relying upon the sale of the underlying assets in order to be repaid.
risk
The lender may demand that all assets acquired under the floor planning arrangement be sold at a price that is no lower than its original ______.
purchase
A ______ covers the purchase of a specific asset, which is paid for by the lease provider on the company's behalf.
lease
In a Capital Lease, the lessee can only record the ______ portion of a capital lease payment as expense.
interest
An Operating Lease typically does not cover the full ______ of the asset.
life
A Line of Credit is a commitment from a lender to pay a company whenever it needs ______, up to a preset maximum level.
cash
An Asset-Based Loan is a loan that uses fixed assets or ______ as collateral.
inventory
In a Capital Lease, the lessee records the underlying asset as its ______ in its general ledger.
property
A Line of Credit will charge ______ as soon as money is borrowed.
interest
Study Notes
Types of Debt
- Commercial Paper: unsecured debt with a fixed maturity of 1-270 days, used to meet short-term working capital obligations, sold at a discount from face value, with the discount rate increasing with term length.
Factoring
- A financial transaction where a company sells its accounts receivable to a factor at a discount, also known as invoice factoring or accounts receivable financing.
Field Warehouse Financing
- A loan using a company's inventory as collateral, with the inventory segregated and controlled, often stored in a public warehouse, and signs indicating a lien on the inventory.
Floor Planning
- A financing method for inventory purchases, where a lender pays for assets and is repaid from sale proceeds, commonly used for large assets like cars or appliances, with the lender at risk and demanding sale at original price, regular inventory counting, and loan repayment by a certain date.
Leases
- A contract covering the purchase of a specific asset, with the lease provider paying on the company's behalf, and the company paying a fixed rate including interest and principal.
- Capital Lease: the lessee records the asset as property, with only the interest portion of the lease payment recorded as expense.
- Operating Lease: the lessor records the asset, with the lessee recording lease payments as an expense, typically not covering the full asset life and without a small-dollar buyout option.
Line of Credit
- A lender's commitment to pay a company up to a preset maximum, secured by company assets, with an interest rate near the prime rate, allowing flexible borrowing and repayment.
Loans
- Asset-Based Loans: a loan using fixed assets or inventory as collateral, providing a flexible loan amount based on the assets' value.
Understand commercial paper, its use, and characteristics. Learn how companies issue it to meet short-term working capital obligations and its relation to interest rates.
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