Short Term Financing:Inventory Financing (Part 2)
Part 1 dealt with using accounts receivable for short term secured borrowings.
Now, let’s look at converting our inventory into cash using it as collateral for cash loan. The loan value depends on the following:
- Marketability of the gooods;
- Price stability of the goods;
- Perishability of the goods
Basically, there are few ways of doing so:
- Trust Receipts Loan
In our earlier article, we have mentioned about this. In brief, this is merely an instrument acknowledging that the borrower holds the goods in trust for the lender. The key feature is that the borrower is entrusted with the goods and to remit the proceeds to the lender upon the sale of the products. Also normally used for easily identifiable inventories like cars, televisions,etc
- Blanket Inventory Liens/floating inventory liens
This facility still allows the borrower to sell any of its inventories. It merely gives the lender a claim/lien against al the inventories of the borrower. Hence, the value of the collateral can fluctuate. Therefore the amount advanced is less than 50% of inventories value. Normally, all the goods are pledged as collateral
- Warehouse Financing
In this case, the lender hires an independent third party to take possession of the goods. The warehousing company acts as agent for the lender.
There are two types of arrangement namely the warehouse is situated in the borrower’s place and the other is outside of the borrower’s location.
There are the Terminal Warehouse Loan where the goods are not easily identifiable for example sugar, cement, coconut oil and Field Warehouse Loan where the goods are bulky and are stored in the borrowing firm’s warehouse, for example logs.
For all the above inventory financing, the firm has to sign documents undertaing that the inventories actually belong to the bank or financial institution. After sales are made to third partie, the bank will be paid to offset the loan given.
- Short Term Financing-Bank Overdraft Facility
- Current Assets As Collaterals For Short Term Financing (Part 1)
- Short Term Finance: Taking Cash Discount From Supplier
- Medium Term Financing- Hire Purchase and Leasing Facility (Part 1)
- Hypothecation
- Finance: Trust Receipt Facility
- Short Term Decision Making: Understand Relevant Costs(Part1)
October 23, 2006
Posted in: Sources of Financing
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