Economic Aspects of Inventory and Receivables Financing

When one speaks of inventory and receivables financing, he thinks primarily of the financing by non-farm business enterprises of their stocks of raw materials, goods in process, and finished goods, and of their credit sales to customers.Defined broadly, of course, these terms include the financing of stocks of goods held by households, farms, institutions, and government, as well as business, and of any credit extended by such units.This article, however, will confine itself to the financing of inventory and receivables in the narrower sense.As to the financing of these types of business assets, the article is concerned with the part played by financial institutions, principally commercial banks, although other sources of funds, such as undistributed earnings and trade suppliers, are also used for this type of financing. THEORETICAL IMPLICATIONS OF INVENTORY AND RECEIVABLES FINANCINGThe primary economic significance of the financing of business inventory and receivables relates to its function as an aid to business activity.Such financing enables capable business men who are without adequate funds to initiate or expand their activity.It also provides business men with a flexible source of funds to finance seasonal and other temporary requirements for funds and thus enables them to operate on a minimum amount of permanent capital.This financing is most often accomplished (i) by the channeling of funds through financial institutions from persons who are willing to lend but unwilling or unable to go into business themselves, and (2) by the "creation of funds" by commercial banks.In a broader sense, however, the economic significance of the financing of business inventories and receivables results from the effects of the bank credit created for providing such financing.In this sense it becomes important to consider the general economic effects of the creation of funds through the extension of bank credit.The fact that banks create funds and the explanation of the manner in which such funds are created are now quite generally accepted.In brief, this creation of fimds is possible because of the small amount of cash which individual banks have