Introduction to Finance

LEARNING ACTIVITY
1. The Commercial Finance Association is a trade association for commercial fi nance 
companies. Learn more about the industry at http://www.cfa.com.
2. Visit SunGard’s trading system website at https://mm2.sungard.net/sungardInvestor/. 
For a variety of fi nancial market information, see the Bloomberg website at http://
www.bloomberg.com.
16.5
Additional Varieties 
of Short-Term Financing
We have reviewed several types of short-term fi nancing in our discussion of fi nancing pro-
viders. For example, in our prior discussion of banks, we discussed lines of credit, revolving 
credit agreements, and SBA loan guarantees. Suppliers off er trade credit. The fi nancial mar-
kets off er the ability to sell commercial paper. In this section, we will discuss other varieties of 
short-term fi nancing. For the most part, these fi nancing arrangements are available from banks 
and commercial fi nance companies and are forms of secured fi nancing. 
Secured lending 
(also 
called 
asset-based lending
) means that there is some collateral or security backing the loan 
that can be claimed or sold by the lender if the borrower defaults. We have seen this type of 
lending before in the Chapter 10 discussion of mortgage bonds. In this section, we examine 
the use of asset-based lending for short-term fi nancing purposes.
Accounts Receivable Financing 
The business that does not qualify for an unsecured bank loan or that has emergency needs 
for funds in excess of its line of credit may decide to use its accounts receivable as a way to 
raise needed funds. Two methods exist for using accounts receivable as a form of asset-based 
lending. First, the fi rm can borrow using its accounts receivable balances as a 
pledge
. This 
is called pledging accounts receivable. Second, the fi rm can sell its accounts receivable to a 
factor
; thus, selling accounts receivable balances is called 
factoring
.
These two methods of using accounts receivable to raise funds diff er in many ways. We’ll 
discuss the general process of each before reviewing the diff erences between them.