Finances: Advantages And Disadvantages Of Marketable Finance

Marketable Securities

Marketable securities is a financial instrument which has high liquidity. They provide very low yields, usually lower than operating assets. It is a better option than keeping idle cash because cash doesn’t yield any interest whereas marketable securities earn decent returns. Marketable securities can also be used as transaction balance or precautionary balance in case higher cash outflow. Liquid assets can be better than bank credits as well, it gives protection in case the bank credit limit is exceeded.

Benefits of marketable securities

a. It reduces risk and transaction cost as the firm will not have to borrow cash frequently.

b. It also helps in bargain purchases and in growth opportunities.

Disadvantages of marketable

Short-term financing can be obtained much faster than the long term financing. Banks who issue long term financing go through a rigorous process of evaluating the credit worthiness of the firm before issuing a loan. Short-term financing can be availed without going through the hassles of long-term borrowing.

2. If the business is seasonal or cyclical, a firm would not be willing to borrow for a longer period of time. Floatation cost are higher for long term loans and the repayment penalties are also higher. Also, long term loans are very restrictive as compared to the short term loans and prevents future investment plans of the firm.

3. Interest rates are generally in case of short term borrowings. The yield curve for short term is upward sloping.

Disadvantages

1. Short term borrowings are riskier than the long term borrowings. The interest payment in case of long term is stable over a period of time. Interest rates fluctuates a lot in case of short term borrowings at times becoming very

Banks issue 90-day notes which can be renewed after 90-days. The decision of renewal issues completely up to the bank and hence makes it a riskier option.

2. Promissory Notes

Promissory note is a financial instrument. The note will following mentioned: a. the interest rate, b. the amount borrowed, c. the repayment schedule, d. collateral and e. terms and conditions bank and the firm has agreed.

3. Compensating balances

Banks require the firms to keep a certain percentage of the loan amount in their account. For example, if the firm has to $80,000 and the bank requires the firm to keep 20% then the firm will borrow $100,000 in order to fulfil its requirement of $80,000. This increases the interest rate for the firms. This is not used much now a days.

4. Line of Credit

It is the maximum credit the bank will extend to the borrower. It is like a credit card for the firms and is an informal agreement between the firm and the bank.

5. Revolving Credit Agreement

It is a formal line or credit generally used by bigger firms. It is different from informal line of credit: the bank has a legal obligation to honour the revolving credit agreement. The bank receives a commitment fees in lieu of it. A clean up clause is sometimes used which requires the borrower to reduce the loan balance to zero at least once a