ASSIGNMENT 2

Write short note on the following

A. Line Credit
B. Revolving Credit
C. Letter of Credit
D. Commercial paper
E. Trade Credit
F. Inventory Loan

Line of Credit
A line of credit is a credit facility extended by a bank or other financial institution to a
government, business or individual customer that enables the customer to draw on the facility
when the customer needs funds. A line of credit takes several forms, such as an overdraft limit,
term loan, discounting, purchase of commercial bills etc. The maximum amount that a borrower
can withdraw is called credit limit. Interest is paid only on money actually withdrawn. Lines of
credit can be secured by collateral, or may be unsecured.

Advantages
Lines of credit have two main advantages over other alternatives. They can be very flexible, as
long as you use them within the limits.

Lines of credit are also less expensive than other alternatives. Therefore, they can work with
businesses that have low margins.

Disadvantages
However, lines of credit also have disadvantages. Lines of credit are an option only if you or
your company has assets and a trading history.

A greater disadvantage is that it’s hard to get an increase if you need more funds. This limitation
can create a serious problem if your company is growing quickly and you have reached your
credit limit.
Revolving Credit
Revolving credit is a type of loan that gives you access to a set amount of money.
You can access money until you have borrowed up to the maximum amount, also known as your
credit limit. Revolving credit is therefore type of credit which after utilization it can be
automatically reinstated for further drawings.it allows the borrower to borrow, repay it off and
re-borrow again over the over facility.

Three types of revolving credit are:

 Credit cards
 Personal lines of credit
 Home equity lines of credit (or HELOC)

Advantages of Revolving Credit

A. The greatest advantage of revolving credit is that it is available when you need it.
B. It is flexible and convenient.
C. It offers financial solutions to people

Disadvantages of Revolving Credit

A. The terms and conditions of the loan are not fixed
B. The Borrower Credit Score can affect the credit limit
C. Revolving credit can be a little too flexible

Letter of Credit
A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be
received on time and for the correct amount. In the event that the buyer is unable to make a
payment on the purchase, the bank will be required to cover the full or remaining amount of the
purchase. It usually has four parties involved depending upon the complexity of the transaction
The parties involved are the beneficiary, the buyer, issuing Bank and Advising Bank
Letter of credit is usually used in international trade and it is governed by Uniform Customs
Practice (UCP 600 Revision 2007)
Types of Letters of Credit
A. Revocable Letter of Credit
B. Confirmed Letter of Credit
C. Back-to-Back Letter of Credit
D. Irrevocable Letter of Credit
Advantages Letter of Credit
A. Secure methods of payment for exporters
B. It gives the buyer the guarantee that the seller will perform their side of the deal
C. The seller is assured that upon the presentation of document within the agreed time frame
they will receive full payment on time

Disadvantages Letter of Credit

A. Using letter of credit can sometimes cause delay and administration problems
B. There is an additional cost in using letter of credit
C. The risk inherent in a letter of credit are credit risk, regulatory risk, settlement risk and
country risk

Commercial paper
is an unsecured and promissory note issued to finance the short-term credit needs of large
institutional buyers. Banks, corporations and foreign governments commonly use this type of
funding It is therefore writing promise by a company to an investor that gives the investor the
assurance that the company will make payment on due date when it matured.

Characteristics of commercial paper

A. It is issued by companies’with good balance sheet and good financial status
B. It has maturity of seven (7) days to one (1) year
C. It provides convenient financing method
D. It usually offered at discount
E. It is issued by blue chips companies

Trade Credit
Extended by one trader to another when the goods and services are bought on credit. Trade credit
facilitates the purchase of supplies without immediate payment. Trade credit is commonly used
by business organizations as a source of short-term financing. It is granted to those customers
who have a reasonable amount of financial standing and goodwill.
The features of trade credit are given below
A. It is an internal arrangement between the buyer and seller.
B. It is a spontaneous source of financing.
C. It normally depends on the bargaining power of the seller and the buyer.
D. It normally depends on the type product which turnover is quick and credit period is
shorter
Advantages of Trade Credit:
A. It is easy and automatic source of short-term finance.
B. It increases sales since customers will buy more of the product if they do not have to pay
cash immediately
C. It provides customers loyalty since the extension of credit terms tells the buyer that the
seller is confident in them and consider them credit worthy.
D. The is no collateral required under trade credit
E. It does not require any negotiation or formal agreement.

Disadvantages of Trade Credit:

A. High possibility of bad debt
B. Delay in payment
C. There will be a negative effect on cash flow since the seller do not received cash
immediately for sales

Inventory Loan
An inventory loan is a type of short-term business loan offered to retailers so they can buy stock.
The loan is secured against the stock, which is used as collateral in the event that the stock is not
sold.
When applying for an inventory loan be sure that you can actually sell all the stock you buy.
This form of lending can be a good form of finance, but make sure that it is something you
definitely need first!

Advantages and disadvantages

The obvious advantage of inventory loan is that it can improve your working capital. It can provide
you with a tool to finance your assets and grow your business.

However, inventory financing does have some disadvantages. The main disadvantage is cost. It is
more expensive than other asset.
Additionally, the appraised value of the inventory can often be substantially lower that what you
paid your supplier. This lower appraised value affects the amount of financing you can get.