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QUESTION 3 Which one of the following items is a key risk for a line of...

QUESTION 3

Which one of the following items is a key risk for a line of credit that finances ongoing needs related to current assets?

On-time and within budget completion of property improvements

Sale of inventory and collection policies related to receivables

Time it takes to complete multiple operating cycles

Time it takes to complete a project and doing so within budget
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Answer #1

Sale of inventory and colletion policies related to receivables

Working capital financing or the working capital loans finances the operational needs of a firm through its operating cycle. Financing is provided based on the estimated levels of production, sales and operating activities after providing for a reasonable haircut in the form of long term funding by the firm. Thus, one of the key risks faced by the bank is with respect to the quality and rotation of the current assets such as the inventory and the accounts receivable. If the firm is not able to sale the inventory or turn the receivables around for cash, it shall need additional financing and its liquidity may be under stress.

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