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Credit

In: Business and Management

Submitted By ginausm
Words 284
Pages 2
Module 4
Demand for Credit:
Companies demand credit for various operating, investing and financing activities.

Operating activities – many companies have cyclical operating cash needs. For example, manufacturers of inventory or retailers that purchase merchandise for the end of year holiday season.

Investing activities – companies routinely require large amounts of cash for investments including purchases of new equipment and property and for corporate acquisitions. Important for start-ups and growth companies.

Financing activities – for issuance of debt for repayment of maturing debt obligations or the repurchase of common stock.

Supply of Credit:
Trade credit – from supplies is routine and most often non-interest bearing.

Bank loans – banks structure financing to meet specific client needs. Bank regulators require that banks hold capital in proportion to their loan portfolio.

Revolving credit lines – loans that companies draw on as needed. They are like credit cards because a company can take cash out as needed and make payments as cash is available.

Lines of credit – are guarantees that funds will be available when needed. These LOC act as backup or interim financing.

Letters of credit – facilitate private international transactions. A letter of credit interposes a bank between the two parties to a transaction. The letter provides a guarantee of payment from the buyer. The benefit is that is substitutes the bank’s credit rating for that of the buyers.

Term loans – a company applies for a loan, receives a set amount of cash at the start of the loan. Periodic payments of principal and interest are made.

Mortgages – are loans secured by long-term assets such as land and buildings, which means that the lender can foreclose on the mortgage and seize the property in the event of...

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