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Credit Line Can Be a Beneficial Safety Net to A Company Discusions

Credit Line Can Be a Beneficial Safety Net to A Company Discusions

Question Description

respond with 200 words (11 p1)

(michelle) In this week’s Concepts in Action video we are introduced to XL Hybrids and it’s founder and president Mr. Todd Hinz. It’s a leading company in electric power train development, which makes electric batteries for large fleets of vehicles for companies like Coca-Cola and Fedex. He saw a need in a market that could saves these companies tens of thousands of dollars switching to electric. He goes into detail about how he had to raise money to develop the product and needs investors to help keep the company moving forward.

The term “free money” is used in the video. This does not mean the money is actually free though. Companies have lines of credits and debits, which they use to purchase things when they don’t exactly have the money. Like in the video, they talk about how they have to pay suppliers before they get paid from their customers. So they use their line of credit with the supplier to pay them, even though they technically don’t have the money. “In capital budgeting we focus on estimating the cash flows we expect an individual project to produce in the future, which we refer to as incremental after-tax free cash flows” (Parrino, 2014).

The best personal example I can think of is using a credit card. There is a limit on how much can be spent in the pay period, and down the line it ust be paid back. But for a short period of time, I have buying power that I not typically have.

respond with 200 words (11 p2)

(tyler) Having access to a credit line can be a beneficial safety net to a company with unforeseen near future expenses. With a credit line a company has access to a predetermined amount set by the bank either by a verbal agreement or what is know as revolving credit. With a verbal agreement a company can take a credit line for 3 years up to a certain amount. This means they are not obligated to borrow the complete amount but that they have access to that amount over a 3 year span. With a credit line like this can come stipulations, the obvious being interest, but there are other stipulations such as compensating balances. A compensating balance is an amount of money the bank is forcing you to keep. If the loan amount is $100,000 and they want a 10% compensating balance than the actual loan amount is $90,000. This also essentially drives up the interest rate, due to the fact that you are still paying interest on the total loan amount.

Revolving credit is a credit line that a bank is contractually obligated to pay. A company agrees to a credit line of say, $100,000. They must pay x amount of interest on that money, as well as an additional fee for unused funds at the end of the year. This can also drive up the perceived interest rate on the loan.

Credit lines are a great tool for companies looking for quick access to funds. With this quick on-demand access to money comes some additional fees for convenience.

respond with 200 words (11 p2)

(warren) Short-term financing utilizes short-term debt, such as a bank loan, in order to fund seasonal working capital, along with some permanent working capital and fixed assets (Parrino, 2015). Many times, short-term capital is typically cheaper than long-term capital, simply because yield curves are typically upward sloping (Parrion, 2015). While there are some advantages to short-term financing, it is important that it is used in an effective manner.

While short-term financing can be very beneficial to a business owner when funding short-term assets, it can cause many issues when used to fund long-term assets. Although short-term loans can be used to fund long-term assets, they must be renegotiated at the end of each loan term. If interest rates are to change throughout this time, the business owner may end up spending more money on a new short-term loan. If they had invested in a long-term loan, it most likely wouldn’t be subject to interest rate changes, as where short-term loans must be negotiated differently at the end of each period. It is very important to evaluate whether or not a short-term loan will cover the entirety of a certain investment. If the loan will have to be renegotiated, one should entertain the idea of a long-term loan instead.

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