FMGT 1013 – Short-Term Financing & Working Capital Management

Vocabulary flashcards covering key terms and concepts from Lesson 6 of FMGT 1013 (Short-Term Financing Decision and Working Capital Management).

Working Capital

The difference between a firm’s current assets and current liabilities; represents the liquidity available for day-to-day operations.

Net Working Capital (Formula)

Net Working Capital = Current Assets – Current Liabilities.

Financial Structure

The mix of current liabilities, long-term debt, retained earnings, and equity that finances a company’s assets.

Short-Term Financing Decision

Choice of funding sources that mature in less than one year to cover operating needs.

Trade Credit

Short-term credit granted by suppliers (accounts payable); often carries an implicit interest cost.

Cost of Not Taking Cash Discount

The effective interest rate a firm pays when it foregoes a supplier’s early-payment discount.

Short-Term Bank Loan

A loan maturing in less than one year, frequently used to finance seasonal working-capital needs.

Self-Liquidating Loan

A short-term loan repaid from the cash generated by selling the inventory and collecting receivables it financed.

Secured Loan

Bank lending backed by specific collateral, such as receivables or inventory.

Unsecured Loan

Loan with no pledged collateral; carries a higher stated interest rate to compensate the lender’s risk.

Collateral

Assets pledged to secure a loan, providing the lender a secondary repayment source.

Floating Lien

A security interest in continuously changing assets like receivables and inventory.

Effective Interest Rate

The true annual cost of borrowing, based on interest paid versus actual funds received.

Simple Interest

Interest calculated only on the original principal amount for the loan term.

Compound Interest

Interest computed on principal plus previously accrued interest.

Compensating Balance

Minimum deposit a borrower must maintain with the bank; reduces usable funds and raises the effective rate.

Discounted Interest (Interest Deducted in Advance)

Loan structure where interest for the entire term is withheld up front, increasing the effective cost.

Installment Loan

Loan repaid through periodic payments that include both principal and interest—forms an annuity.

Revolving Line of Credit

Contractual, renewable credit line secured by receivables/inventory; interest charged only on outstanding balance.

Commitment Fee

Charge on the unused portion of a revolving credit line.

Warehouse Financing

Loan collateralized by inventory stored at a third-party (terminal) or borrower’s site (field) warehouse.

Terminal Warehouse Receipt

Document proving the bank’s claim to inventory stored at a public warehouse.

Field Warehouse Receipt

Receipt covering collateral stored on the borrower’s premises but controlled by a third-party agent.

Inventory Financing

Arrangement where the creditor holds title to inventory while the debtor sells it as trustee, paying interest on funds advanced.

Transaction Loan

Loan granted for a specific purchase (e.g., equipment), typically secured by the item acquired.

Chattel Mortgage

Loan secured by movable personal property, such as vehicles.

Repurchase Agreement (Repo)

Dealer sells government securities with a commitment to buy them back; acts like a secured, short-term loan.

Accrued Expenses

Spontaneous financing arising from unpaid wages, taxes, or interest until settlement date.

Line of Credit (Unsecured)

Pre-approved bank borrowing limit for seasonal needs; usually must be cleared to zero for 30 days annually.

Commercial Paper

Short-term, unsecured promissory note issued by large firms as a low-cost alternative to bank loans.

Bankers’ Acceptance (BA)

Time draft guaranteed by a bank, used in trade financing; becomes a negotiable instrument.

Spontaneous Financing

Funding that arises automatically from operating activities, such as trade credit and accruals.

Cost-Benefit Analysis (Financing)

Evaluation comparing interest cost and other fees across financing options to choose the lowest-cost source given risk.