Inventory Financing. Usually only finished goods and raw materials inventory qualify as a form of collateral. There is no market for work in process. Lenders will usually provide financing in the amount of one-half of the collateral that qualifies. This is a good form of financing to cover the cost of fulfilling a very large order from a high-quality customer, or perhaps, in a seasonal business, to cover a period of high cash needs that will be followed by a period of high cash inflows.

Using inventory as collateral requires fairly sophisticated inventory control methods, including systems support. This imposes corporate self-discipline, which the company should have anyway.

Floor Planning. Floor planning is a special form of inventory financing that is very common in the retail sale of very highpriced products, such as boats, cars, and appliances. With this form of financing, it is the vendor and its products that must be credit-qualified. The lender buys the products from the manufac turer and places them in the retailer’s store and supporting warehouse, in effect lending them to the retailer.

The lender retains title to the products. When the product is sold by the retail dealer, the dealer must first pay the lender in order to get title, which it can then transfer to the purchasing customer. This may be a simultaneous transaction, so that the retailer just receives the difference between the selling price and the loan amount.

Floor planning is often provided by a finance company owned by the manufacturer. The manufacturer and its associated finance company will provide various ‘‘bargains’’ to induce the retailer to overload on inventory. This smooths out the manufacturing process and places a lot of product in the dealer’s showroom, which presumably will help sales. Slow-moving product is often provided to the dealer at zero financing cost as a way for the manufacturer to handle excess inventory.

As a business lesson, count the number of cars in a dealer’s lot, calculate the estimated value of those cars (maybe the number of cars _ $20,000), and multiply that by 1 percent per month (the interest the dealer has to pay on the loan). You can get an idea of how many cars a dealer must sell each month just to cover its floor plan interest expense.

Revolving Credit. This is basically a working capital loan with accounts receivable and inventory as collateral. The maximum amount of the loan is based on a formula tied to highquality inventory and accounts receivable. For example, the maximum amount might be 75 percent of accounts receivable less than 60 days old and 50 percent of finished goods and raw materials inventory less than 60 days old. This formula forces the company to make regular payments and reduce the outstanding debt when the inventory is used and the receivables are collected.

Because of the pressure to repay and the constant monitoring of working capital, it would be very dangerous for a company to use this form of funding to support long-term projects. Some banks require what is known as a ‘‘cleanup’’ period. This means that for some period of time, perhaps one month per year, the loan balance must be zero.

Zero-Balance Accounts. This type of account may very well be required by another loan agreement. In a ‘‘regular’’ loan, the borrower collects funds from its customers, deposits the funds in the company checking account, and makes some sort of payment to the lender for principal and interest on the loan. With a zerobalance feature, the loan and the checking account are connected. When customer payments are deposited in the checking account, the funds are automatically used to reduce the loan balance and pay the interest that is due. Since the account balance is therefore zero, when the company writes checks, these checks increase the loan balance.

This feature is very similar, conceptually, to the overdraft privileges attached to individuals’ checking accounts (although individuals usually decide how much of the funds they deposit should be used to reduce the loan balance, subject to a minimum monthly payment). This feature can be very beneficial to the company because float is reduced to zero. Customer payments automatically reduce the loan balance. The interest rate may also be advantageous because the bank knows that as the company receives payments from its customers, the loan will be repaid. Also, the company borrows only the exact amount it requires.