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Methods of Using Inventory as Short Term Collateral Essay


Inventories are appropriate as security for loans since they are liquid assets. While using inventories, the lender establishes a percentage advance based on the market value of the collateral. In other words, the market value of the collateral serves as a basis in which the lender establishes a percentage advance. This paper focuses on floating lien, trust receipt and warehouse receipt loan, as methods of using inventory as short-term collateral.

In a floating inventory lien, the entire inventory acts as collateral for the loan, while over half of the cost of all items becomes granted and the interest rate is about 4 % higher than the existing interest rates. The floating lien also called the blanket loan becomes relevant in circumstances whereby the cash requirements of a company are large compared to the value of its inventory.

Mostly, a floating lien becomes requested just as an extra protection and plays a role in establishing whether a loan can be made. The lender agrees to just make a moderate advance even when the collateral is valuable due to the hardship in exercising rigid control over the collateral. It is possible for the floating lien to cover both inventories and receivables together with the receivable collections, and such adjustments offers the lender alien on a key potion of a company’s current assets.

In a trust receipt finance structure, the borrower gets entitled to the earning from the sales of the inventory and the inventory itself. Trust receipts get widely used by dealers in equipment and automobiles.

A vehicle manufacturer will transport automobiles to a dealer who in response may fund the payments for these automobiles via a finance corporation, or else the financing corporation compensates the manufacturer for the shipped vehicles and after an automobile gets sold, the dealer reimburses the sum borrowed and keeps the quantity agreed with the customer on top of the price acquired from the financier.

In this arrangement, the main risk is that the inventory may be sold without the income becoming given to the lenders although there is more rigid control over collateral with a trust receipt accord than with a floating lien. Also, the lender has to practice judgment before agreeing to land under this structure, since a fraudulent dealer may formulate several methods to trick the lender.

Furthermore, warehouse receipts exist in two forms including negotiable and non negotiable. The negotiable receipts should be given to the warehouse operator prior to release of commodities. Conversely, a non negotiable warehouse receipt gets presented in favor of the lender who has the authority to release commodities as he gets title over them. The majority of the lending agreement use non negotiable receipts. Besides, commodities get located in a public warehouse, in instances of a terminal warehouse receipt loans.

There, also, exists another arrangement called field warehousing. This arrangement allows the making of loans against the inventory, which may be positioned on the premises of the borrower. A field warehousing firm sets off a chosen storage region on the premises of the borrower, for the inventory presented as collateral.

The field warehousing firm ensures that there is strict control over the area and that only the firm accesses the area. The lender becomes granted physical power over objects that are not fragile or specialized, and are hard to recognize. A warehouse receipts get issued by the field warehousing company, and the lender pulls out a loan depending on the collateral value of the inventory.

Lending via field warehouse receipts is most suitable when a borrower need to use the inventory frequently, although this method may be expensive. A warehouse receipt loan offers the lender a high level of control over the collateral when carried out correctly. Nevertheless, many incidences of scams demonstrate that the receipt of warehouse does not always confirm receipt of actual value. For instance, barrels said to be full of chemicals may be only half full.

Frequently, the floating inventory lien is likely to be more risky than the other three choices because of the hardship in indicating the precise amount and objects of inventory on site at any one occasion. The idea of the loan gets founded on an accounting approximation of less than half of the book value of the mean inventory. In case, it becomes necessary to sell the commodities following nonpayment by the borrower, the lender might find the precise composition of commodities to be different, considerably, than anticipated, at first.

In conclusion, the floating lien becomes relevant in circumstances whereby the cash requirements of a company are larger than the value of its inventory. Conversely, trust receipt finance structure gets widely used by dealers in equipment and automobiles. Lastly, the warehouse receipt loan offers the lender a high level of control over the collateral when carried out correctly. Out of the three inventories, the floating inventory lien is likely to be more risky than the other three choices.

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IvyPanda. (2019, May 17). Methods of Using Inventory as Short Term Collateral. Retrieved from https://ivypanda.com/essays/methods-of-using-inventory-as-short-term-collateral-essay/

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"Methods of Using Inventory as Short Term Collateral." IvyPanda, 17 May 2019, ivypanda.com/essays/methods-of-using-inventory-as-short-term-collateral-essay/.

1. IvyPanda. "Methods of Using Inventory as Short Term Collateral." May 17, 2019. https://ivypanda.com/essays/methods-of-using-inventory-as-short-term-collateral-essay/.


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IvyPanda. "Methods of Using Inventory as Short Term Collateral." May 17, 2019. https://ivypanda.com/essays/methods-of-using-inventory-as-short-term-collateral-essay/.

References

IvyPanda. 2019. "Methods of Using Inventory as Short Term Collateral." May 17, 2019. https://ivypanda.com/essays/methods-of-using-inventory-as-short-term-collateral-essay/.

References

IvyPanda. (2019) 'Methods of Using Inventory as Short Term Collateral'. 17 May.

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