Debt Funding & Covenants: Cash Management, Loan Types, and Collateral

What is the cash conversion cycle?

The time period from expending cash for the production of goods to the receipt of cash from customers in payment of those goods.

What does the cash conversion cycle calculation include?

Days receivables, days of inventory, and days of payables.

What are the components of fixed asset turnover ratio?

Gross fixed assets, accumulated depreciation, and net annual sales.

How should an analysis of cash forecast accuracy be based?

On absolute variance.

What are options to raise cash through debt financing?

1. Asset-based lending 2. Unsecured lending 3. Guaranteed financing.

What are examples of asset-based lending?

Line of credit, invoice discounting, factoring, inventory financing, Purchase Order Financing, leases.

What is unsecured lending?

Lending where no company assets are used as collateral; relies on cash flows for repayment.

What is guaranteed financing?

Financing that may include a bank loan.

What are the associated costs of a bank loan?

1. Periodic interest charges 2. Annual servicing fees 3. Lender audits 4. CPA audits.

What factors do banks consider when extending a loan?

Collateral and loan repayment.

What does a working capital loan include?

1. Type and amount of loan 2. Fees and interest 3. Restrictions on loan proceeds.

What ongoing concerns arise once a bank loan is made?

1. Monitoring compliance 2. Maintaining accurate banking records 3. Scheduling relationship reviews.

What are noncredit banking service charges included in?

A bank's account analysis.

What is a borrowing base certificate (BBC)?

A certificate showing the total amount of collateral against which a lender will lend funds.

What do lenders need for collateral?

Credit insurance and personal guarantees.

What is invoice discounting?

Submitting customer invoices to lenders to obtain loans of 70-90% of total invoices.

What are the downsides of invoice discounting?

High interest and restrictions if another lender has blanket title to all company assets.

What is factoring?

A company sells its accounts receivable to a third party (factor) for immediate cash.

What are the components of a factoring arrangement?

1. Advance 2. Reserve 3. Fee.

What is the difference between recourse and non-recourse factoring?

With recourse, the factor can pursue the company for unpaid invoices; without recourse, the factor absorbs bad debt losses.

What is inventory financing?

A financing method where lenders control inventory tightly and it is the most intrusive and expensive form of financing.

What is Purchase Order Financing?

Financing where the lender accepts a purchase order as collateral to fund the purchase of materials.

What are considerations for long-term loans?

1. Stability of company 2. Covenants 3. Creditor positioning 4. Personal guarantee 5. Balloon payment.

What are considerations for short-term loans?

1. Uncommitted line of credit 2. Committed line of credit 3. Asset-based lending.

What is commercial paper?

A type of unsecured, short-term debt instrument issued by corporations for financing short-term liabilities.

What is a loan covenant?

A clause in the loan agreement requiring the borrower to do or refrain from doing certain things.

What is an example of a negative loan covenant?

Borrower cannot allow certain financial ratios to fall below specified amounts.

What does deleveraging mean?

Using accumulated cash to pay down debt.

What is a letter of credit?

An assured form of payment for an exporter.

What are the costs of paying with checks?

Cost of check stock, bank fees to process checks, and mailing costs.

What is the ACH payment system designed for?

Low value, high volume payments.

What is positive pay?

A system used to avoid the acceptance of fraudulent checks.