6. Debt Finance Flashcards
3 types of loans?
- Fixed term loan: Repay in instalment but time + effort to negotiate
- Revolving Credit Loan: Can borrow maximum amount and repay at end but time + effort to negotiate
- Overdraft loan: high interest and can ask to be repaid on demand but less formalities + flexible
What is a debenture?
written agreeement for loan to company granted by a company/LLP
written agreeement for loan to company granted by a company/LLP
Advantages of overdraft facility?
+ flexible, can spend over limit
+ few formalities to set up
What companies need overdraft facility
small or medium companies
Disadv of overdraft facility?
- High interest (compound)
- Demand repayment at any time
Adv of term loan?
+ Less interest
+ secured
+ only asked to repay under contract terms
Disadv of term loan?
- lots of negotiation and legal docs to set up
- cannot re-borrow money
When are term loans used?
purchase assets
When are revolving credit facility used?
Company doesn’t have steady income stream
Adv of revolving credit facility?
+ no on-demand repayment
+ can reborrow money
+ secured
+ bilateral or syndicated
Disadv of revolving credit facility?
- negotiation + legal docs to set up
Bilateral Loan?
Bank —— Company
Syndicated Loan
Bank —– multiple creditors
What are debt securities?
Loan from investors
Risks of equity finance?
- relies on company’s financial success
- dividends only paid at directors discretion + good performance
- heavily regulated by Companies Act 2006
- restrictions on transfer/borrow of shares in company articles
- shares can go up or down
Who should use equity finance?
+‘high gearing’ - already alot of debt and lenders dont want to loan anymore
+ no want regular repayment
+cannot offer security
+ want investors with skill and experience
Who should use debt finance?
+ retain company control
+ reliable cash flow to meet repayment
+ need money for X period
+ avoid shareholder dilution
+ company has assets to offer as security
+ mature and well established
why would a contract have express covenant?
business must be maintained in a certain way to avoid reliability on loans
examples of covenant?
- capital must be a certain amount
- notify change business nature
- cannot grant new securities
- limit dividends issued
‘pari passu’ principle?
unsecured creditors are all equal
Fixed charge?
Lender has control over asset use + keep in good condition + first right of sale
Floating charge?
Company can use assets as desired until crystallisation - becomes fixed charge
When does floating charge automatically crystallise?
- administration
- liquidation
- receivership
Personal Guarantee?
company director’s personal assets are at risk
