Definition
A Revolving Acceptance Facility by Tender (RAFT) is a financial instrument employed by corporations to manage their short-term financing needs. In a RAFT arrangement, a corporation has access to a revolving line of credit that allows them to draw funds as needed, subject to periodic tender offers. This setup is particularly beneficial for companies that require continual access to funding without the need to renegotiate terms each time.
Key Characteristics:
- Revolving Credit: The facility operates similarly to a revolving line of credit, allowing businesses to borrow, repay, and re-borrow funds.
- Tender Process: Funds are accessed through a tender process where banks or financial institutions bid to lend the required amounts.
- Short-term Financing: Ideal for meeting short-term liquidity demands or financing working capital needs.
- Flexibility: Offers flexibility to the borrower regarding the amount borrowed and the timing.
Examples
1. Corporate Treasury Management
A large manufacturing company needs to manage cash flows efficiently to purchase raw materials and cover operational costs. The company establishes a RAFT with a consortium of banks. Every quarter, the company invites tenders from the banks to bid on the interest rates for the short-term credit it requires. This allows the company to access funds promptly and at competitive rates.
2. Seasonal Business Operations
A retailer experiences high seasonal demand during the holiday season and requires additional working capital to stock up on inventory. By utilizing a RAFT, the retailer can quickly obtain the necessary funds through the tender process without the need for new loan negotiations each season.
Frequently Asked Questions
1. How does RAFT differ from a traditional line of credit?
RAFT involves a tender process where multiple financial institutions can bid to provide the required funds, potentially leading to more competitive interest rates. A traditional line of credit typically involves a single financial institution with pre-agreed terms.
2. What are the primary benefits of using RAFT?
The key benefits include flexibility in borrowing, competitive interest rates due to the tender process, and the ability to meet recurring funding needs without renegotiation.
3. Is RAFT suitable for all types of companies?
RAFT is most suitable for large corporations with significant short-term financing needs and the ability to attract multiple lenders.
4. How does the tender process work in RAFT?
The borrower invites tenders from financial institutions at regular intervals. These institutions then bid by offering interest rates and terms. The borrower selects the most favorable bids.
5. What are the risks associated with RAFT?
The primary risks include interest rate fluctuations during each tender period and the potential lack of sufficient bids, which could lead to funding challenges.
Related Terms
- Line of Credit: A flexible loan arrangement provided by a bank that allows the borrower to draw up to a certain limit at any time.
- Commercial Paper: An unsecured, short-term debt instrument used by companies to finance accounts receivable, inventories, and short-term liabilities.
- Revolving Credit Facility: A type of credit line that remains available up to a maximum limit and can be drawn down or repaid at any time.
- Tender Offer: A public solicitation to all shareholders requesting their tender of shares for sale at a specified price during a particular time.
Online Resources
- Investopedia - Revolving Line of Credit
- Corporate Finance Institute - Revolving Facility
- The Balance - Short-Term Financing
Suggested Books for Further Study
- “Corporate Finance” by Jonathan Berk and Peter DeMarzo
- “Financial Management: Theory & Practice” by Eugene F. Brigham and Michael C. Ehrhardt
- “Short-Term Financial Management” by John Zietlow, Matthew Hill, and Terry W. Maness
- “Intermediate Financial Management” by Eugene F. Brigham and Phillip R. Daves
Accounting Basics: Revolving Acceptance Facility by Tender (RAFT) Fundamentals Quiz
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