Sources of unsecured financing

Unsecured financing is financing for which collateral is not re­quired. Most short-term financing is unsecured. Sources of unse­cured short-term financing include trade credits, promissory notes, bank loans, commercial papers, and commercial drafts.

1. Trade credit

Wholesalers may provide financial aid to retailers by allowing them thirty to sixty days (or more) in which to pay for merchan­dise. This delayed payment, which may also be granted by manu­facturers, is a form of credit known as trade credit or the open account. More specifically, trade credit is a payment delay that a supplier grants to its customers.

Between 80 and 90 per cent of all transactions between busi­nesses involve some trade credit. Typically, the purchased goods are delivered along with a bill (or invoice) that states the credit terms. If the amount is paid on time, no interest is generally charged.

2. Promissory notes issued to suppliers

A promissory note is a written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date. Un­like trade credit, however, promissory notes usually require the borrower to pay interest. Although repayment periods may extend to one year, most promissory notes specify 60 to 180 days.

3. Unsecured bank loans

Commercial banks offer unsecured short-term loans to their customers at interest rates that vary with each borrower's credit rating. The prime interest rate (sometimes called the preference rate) is the lowest rate charged by a bank for a short-term loan. This lowest rate is generally reserved for large corporations with excellent credit ratings. Organizations with good to high credit rat­ings may have to pay the prime rate plus 4 per cent. Of course, if the banker feels loan repayment may be a problem, the borrow­er's loan application may be rejected.

4. Commercial paper

A commercial paper is a short-term promissory note issued by a large corporations. A commercial paper is secured only by the reputation of the issuing firm; no collateral is involved. It is usually issued in large denominations, ranging from $5,000 to $100,000. Corporations issuing commercial papers pay interest rates slightly below those charged by commercial banks. Thus, issuing a commercial paper is cheaper than getting short-term fi­nancing from a bank.

5. Commercial drafts

A commercial draft is a written order requiring a customer (the drawee) to pay a specified sum of money to a supplier (the drawer) for goods or services. It is often used when the supplier is insure about the customer's credit standing.

In this case, the draft is similar to an ordinary check with one exception: The draft is filled out by the seller and not the buyer. A sight draft is a commercial draft that is payable on demand -whenever the drawer wishes to collect. A time draft is a com­mercial draft on which a payment date is specified. Like promis­sory notes, drafts are negotiable instruments that can be discount­ed or used as collateral for a loan.

III. Give the English equivalents.

оказать финансовую помощь, расплатиться за товары, отсроченный платеж, купленные товары, доставляться, платить процент, банковская ссуда, рейтинг кредитоспособности, основная процентная ставка, заявка на выдачу ссуды, письменное распоряжение, быть неуверенным в чем-либо, быть непохожим на что-либо, за одним исключением, передаваемый денежный документ.

IV. Continue the sentences.

1. Sources of unsecured short-term financing include …

1. Wholesalers may provide …

1. Between 80 and 90 per cent …

1. A promissory note is a written …

1. Commercial bank offer unsecured …

1. Organizations with good to high credit …

1. A commercial paper is secured …

1. In this case the draft …

V. Agree or disagree to the following.

1. Unsecured financing is based upon collateral.

2. There are 10 sources of unsecured short-term financing.

3. Between 80 and 90 % of all transactions between businesses involve some trade credit.

4. Promissory notes do not require to pay interest.

5. The lowest rate is generally reserved for small firms with low credit ratings.

6. Bankers always give loan applications.

7. Issuing a commercial paper is cheaper than getting short-term financing from a bank.

8. Draft is totally equal to an ordinary check.

VI. Match the adjectives in the left-hand column with the nouns in the right-hand column.

1. negotiable	1. paper
2. commercial		2. aid
3. short-term		3. instruments
4. large		4. payment
5. financial		5. financing
6. delayed		6. check
7. promissory		7. denominations
8. ordinary		8. note

VII. Choose the word that doesn’t suit the others:

1) merchandise, goods, customers

2) ordinary, commercial, cheaper, negotiable

3) to issue, to secure, certain, to pay, to use.

VIII. Decide what kind of source will be appropriate for:

1. a small firm

1. a large organization

1. a super large corporation

1. an individual

IX. Answer the questions.

1. What does “unsecured financing” mean?

1. What do sources of unsecured short-term financing include?

1. For how many days may wholesalers provide financial aid to retailers?

1. How many per cent of businesses involve trade credit?

1. In what case is no interest charged?

1. What is a promissory note?

1. What is the difference between promissory notes and trade credits?

1. In what case can the borrower’s loan application be rejected?

1. What is the interest in commercial papers?

1. What kind of commercial drafts do you know?

X. Write down advantages and disadvantages of each source of unsecured short-term financing.

Lesson VIII

I. Read and translate the following international words without using a dictionary:

operation, information, manager, agency, financial, balance, firm, activity, period, result, process, systematically, to collect, to analyze, basic, product, client, system, investment, territory, individual, person, plan, to organize, to motivate, to control, credit, risk, potential, investor, investment, form.

II. Remember the following words:

lender – кредитор, заимодавец

stockholder - акционер

statement – зд. отчет

balance sheet – балансовый отчет

income statement – отчет о доходах

summary – обобщенный отчет

transaction – сделка, деловая операция

accounting period – отчетный период

bookkeeping – счетоводство, бухгалтерия

soundness- надежность

liability – зд. задолженность

payroll – платежная ведомость (по зарплате)

deduction – удержание, вычеты

stock – амер. акции

англ. цен. бумаги

bond – облигации