Debt Financing Imagine you work for a privately owned company that sells home security systems and is seeking to open new locations in the five fastest growing cities throughout the United States. To implement this strategy, the company plans to invest in a new technological infrastructure. Because the company does not have the required capital on hand to move in this direction, it requires debt financing. The company has worked out an arrangement with a local bank to establish a line of credit. The bank has put forward the following requirements in the form of a term sheet to finance the necessary debt: o Annual independent audits, with results acceptable to the bank o Company cannot change credit policies for its customers without bank approval. o The Line of Credit amount will be calculated at a maximum of 80% of the company’s Accounts Receivable less than 120 days old. o UCC-1 filing on Accounts Receivable o All customer payments must be submitted to the company through a lockbox account held by bank. Because the owner of the company has many questions concerning this proposed transaction, including the use of negotiable instruments, he has hired you to be his accountant. Your task is to explain the implications of this financial decision to the owner, and to give him your recommendation of how to proceed with the proposed loan. Write the owner a memorandum in which you · Explain the elements of the negotiable instruments likely to be used in this proposed financing transaction. · Compare and contrast primary and secondary liabilities of parties to these negotiable instruments. · Analyze the components of secured transactions and dissect the other required terms as proposed by the bank and their potential impact on the company’s operations. •Explain the rights and responsibilities of debtors and creditors in such secured transactions as the bank has proposed, and how this information may have a bearing on the company’s decision to proceed with the line of credit
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