Managing Cash Flow

252 Investing, Financing, and Borrowing
• Concentration or dispersion of borrowing sources
• Cost-risk decisions with particular attention to the issue of cost versus loyalty
to a particular financial institution
• Flexibility and safety—future availability of funds
• Audit programs and controls
Borrowing Sources
There are numerous opportunities and alternatives for the company to consider in
making borrowing decisions, including:
• The company’s bank. Most borrowers tend to consider their own commercial
bank first when looking for alternative sources of borrowing. The
bank should be familiar with the company’s business and is likely to be
best informed regarding the suitability of the loan. It should be willing
to commit to the company for short-term loans such as open lines of
credit, term notes, demand loans, or automatic cash overdrafts.
Common collateral, if required, for short-term loans is accounts receivable
(typically to 70 percent or 80 percent of face value) or inventory (30
percent to 70 percent of face value depending on stage of completion
and marketability).
• Life insurance policies. The cash surrender value of any life insurance policies
the company carries for key man, estate planning, buy-sell agreements,
or other purposes can be used as a readily available source of
relatively inexpensive short-term borrowing. The amount available, however,
is typically limited.
• Life insurance companies. Loans from life insurance companies are normally
long term and for larger amounts than the borrowings we are considering
here. This is generally not a good source for short-term borrowing.
• Investment brokers. If the company (or its principals) has an account with
an investment broker, the securities held may be usable as collateral for
short-term borrowings.
• Accounts receivable financing. Accounts receivable can be used as collateral
for a short-term bank loan or sold outright to a factor.
• Inventory financing. Company inventory can be used as collateral for shortterm
bank loans, though the percentage of the inventory value received is
likely to be lower than for accounts receivable.
• Customers and vendors. It is sometimes possible to obtain financing from
customers via advances against orders or early payment of accounts
receivable. This is particularly appropriate if there is a lengthy production
or service provision process involved or if there is an expensive specialized
order. Vendor financing can be easier, since the vendor is usually very
interested in making the sale, and financing may be considered part of the
pricing package. In the event of a large-dollar-volume purchase order, it