You've sold 14 tons of burlap to a French ripped-jeans manufacturer. They agree to pay you in eight weeks when your burlap has cleared import inspection from the People's Republic of France. The credit risk on this transaction is extremely low, and the interest rates that get paid are also extremely low. But this kind of short-term credit set of paper is an enormous industry globally, as companies need short-term liquidity to pay for stuff.
In the same vein of collateralized anything (think: mortgage obligations), there is a liquid market of banker's acceptance notes that operate like taxable money-market funds, and give those seeking short-term interest rates a little better than what they get from the cash money-market fund at Schwab. Another little kiss on the cheek.
Related or Semi-related Video
Finance: What are vanilla terms?0 Views
Finance allah shmoop what are vanilla terms Okay you're a
hot little startup you make turbocharged fidget spinners these things
on ly turbo they exist to relax really stressed out
lawyers bankers and you know politicos well Investors were all
excited about the prospects of speed turbo but have a
strong suspicion that this is a fad not a real
business at least not a business that will sustain itself
a decade or two even long enough Teo you know
go public so the term sheet proffered to the founders
seeking to raise money isn't vanilla of vanilla term sheet
would be a set of terms that would be easily
digestible to everyone really simple and really clean That's vanilla
investors generally get preferred stock which sits above common in
the priority stack in a liquidation like things go badly
and you have to sell the company preferred investors get
paid first but preferred investors normally get just one times
their money back in a sail and then split whatever's
left Well a non vanilla form of this term would
be where an investor gets three or four for five
times their money back first before the common stock gets
a dime that is if an investor is giving a
founder of a company with just a million bucks in
revenue a pre money valuation of some forty million dollars
and that investor invest ten million box with a five
acts lick prep for liquidity preference Well then the investor
gets back five times ten or fifty million dollars off
their ten Originally before the founders common stock gets paid
a dime in the case of a sale Now if
company does an ai po and half a billion dollar
valuation well then the preferred stock even it five x
converts to become common and everybody's happy But the five
x lick craft is not a vanilla term It has
spice Other vanilla terms might be where an investor asked
for a royalty of a few percent of revenues off
the top when they invest And yeah the bald guy
on shark tank seems to do this all the time
It's Why he's no longer mr wonderful you know like
why would you invest and then harm the company's profit
margins at the same time By taking the royalty on
revenues Yeah Makes no sense to us either Go figure
Mr wonderful what you're doing on that show Mmm Yummy
Up Next
What is collateral? Any type of asset or property that a borrower pledges as security for a loan is classified as collateral. As the lender has a c...
What is an Agency Relationship? An agency relationship allows an agent to act on behalf of the individual or company who hires them. This type of r...