4.1): Financing a Business: Debt Finance Flashcards
What is debt finance?
how businesses obtain finance by borrowing money
two types: loans and debt securities
What are loans?
business borrows money from bank or other lender
bank overdraft, term loan and revolving credit facility
What are debt securities?
IOUs issued by company to investors in return for cash
repaid at an agreed future date
What checks must a company make before borrowing money?
ensure borrowing is allowed in company constitution
Post-October 1 2009 companies: no restrictions on voting in MAs
Pre-October 1 2009 companies: check memorandum for restrictions
If restrictions exist: special resolution required to remove restrictions.
What should be considered in terms of director’s authority when borrowing money?
directors must have authority to act on behalf of the company: MA 3
if company has amended or bespoke articles: check there are no restrictions
what should partnerships do before borrowing money?
check partnership agreement has no restriction
What are the consequences of failing to repay a loan?
if security is given:
lender may take possession of some of the borrower’s property to sell it and recoup the money owed
What are the two ways loans can be granted?
Loans can be:
Secured: Lender takes security over borrower’s assets.
Unsecured: Higher interest due to lack of security.
What is an overdraft facility?
Allows business to overdraw on its current account to cover day-to-day expenses.
Advantages:
Flexible, easy to arrange.
Disadvantages:
High interest, immediate repayment demand risk, expensive.
What is a term loan?
Fixed amount borrowed for a specific term, repaid at the end of the term.
May be secured or unsecured, and bilateral (single lender) or syndicated (multiple lenders sharing the risk).
Drawdown option: Borrow all at once or in instalments to reduce interest.
Advantages: Certainty of terms, greater borrower control.
Disadvantages:
Time-consuming and costly to arrange; once repaid, cannot be reborrowed.
What are revolving credit facilities?
Bank provides maximum credit limit that can be borrowed, repaid, and re-borrowed during facility’s term.
Combines features of overdrafts and term loans.
Suitable for businesses with uneven income streams.
May be secured or unsecured, and bilateral or syndicated.
Advantages: Highly flexible, interest savings by reducing borrowings.
Disadvantages: Expensive to negotiate and agree, high fees.
What is the similarity between a term loan and revolving credit facility?
both are committed facilities
so once loan agreement is signed, bank must provide business with loan monies when it requests them
What must a bank do when requesting re-payment?
bank cannot demand re-payment of term loan or revolving credit facility whenever it wants
bank can only do so in accordance with facility agreement
What are the ways a loan can be repaid?
bullet payment: in one go at the end of the term
amortisation: equal instalments over the term of the loan
balloon repayment: unequal instalments with last one being the largest
Explain the rules surrounding interest rates payable?
Agreed Rate: No statutory control for companies; terms are stated in the facility agreement.
Fixed Rate: Remains constant throughout the loan period.
Variable/Floating Rate: Adjusted periodically based on a formula linked to the B of E’s base rate.
Default Interest: Higher interest for missed payments, subject to contract law restrictions on penalty clauses.
