Here are some notes on inter-corporate deposits in working capital management in detail:
- Inter-corporate deposits (ICDs) are unsecured loans that one company makes to another company. ICDs are typically used to finance working capital needs, such as accounts receivable and inventory.
- ICDs are a form of short-term financing, which means that they must be repaid within a specified period of time. The interest rate on ICDs is typically lower than the interest rate on a bank loan, but there may be other fees associated with ICDs.
- To qualify for ICDs, a company must typically meet certain requirements, such as having a good credit rating and a track record of profitability. The company must also be willing to offer a competitive interest rate on the deposits.
- ICDs can be a valuable source of financing for businesses that need short-term working capital. However, businesses should carefully consider the terms of the ICD before they accept it.
Here are some of the additional things to keep in mind about ICDs:
- ICDs are not FDIC insured, which means that if the company fails, the depositors may not be able to recover their money.
- ICDs may be subject to withdrawal restrictions, which means that the depositors may not be able to access their money immediately.
- ICDs may be subject to early withdrawal penalties, which means that the depositors may have to pay a fee if they withdraw their money early.
Here are some of the benefits of ICDs:
- They can be a relatively inexpensive source of financing, as the interest rates are typically lower than bank loan rates.
- They can be a quick and easy way to obtain financing, as the terms and conditions are typically agreed upon between the two companies involved.
- They can be a good way to build relationships with other companies, as they can be used to facilitate trade between the two companies.
Here are some of the risks of ICDs:
- The risk of default: If the company that makes the ICD defaults on the loan, the other company may not be able to recover its money.
- The risk of liquidity: If the company that makes the ICD needs to access its money quickly, it may not be able to do so if the other company does not repay the loan on time.
- The risk of regulatory changes: The terms and conditions of ICDs can be changed by regulators, which could affect the cost and availability of financing.