7: Business finance Flashcards
How is business financed?
- stakeholders have finance at stake in the business
- shareholders and lenders obviously invest directly into the business
Financed by:
- equity (owners in return for drawings)
- debt (from lenders in return for interest)
- combination of equity and debt
Describe the balance in short-term and long-term finance
Immediate:
- needs to pay wages
- day to day expenses
Short term:
- pay for goods/services bought on credit (payables)
Medium term:
- needs to pay for an increase in inventory and receivables as the business grows
- pay tax on profit
Long term:
- pay for NCA such as machinery and buildings
What are some risks to borrowers of short term finance?
Renewal risk:
- negotiated relationships with suppliers change or various overdraft facilities expire
Interest rate risk:
- battles fluctuations in short term interest rates
Which types of businesses would choose short term or long term finance options?
Aggressive business:
- more short-term finance than equity
- may return higher profit at greater risk
Average business:
- matches its maturities
- less risk and less return also
Defensive business
- sacrificies liquidity with little short term finance
- low risk, low return business
What is financial intermediation?
Where banks take deposits from customers and then use that money to lend to other customers
The banks effectively act as middlemen providing finance for those that want loans from the desposits made by savers
What are the two main types of banks?
Retail banks:
- take deposits from households and make loans to households and short term loans to businesses
- authorise Faster Paymenrs, BACS and CHAPS
Commerical and investment banks:
- underwriting new securities
- providing advise on mergers and acquisitions
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All banks affected by the activities of the Bank of England
What are the benefits of financial intermediation?
- Small amounts deposited by savers can be combined to provide larger loan packages to businesses
- Short term savings can be transferred into long-term loans
- Risk is reduced as an individual’s savings are not tied up with one borrower directly
What are the two main policies of the Bank of England?
- carrying out monetary policy
- ensuring financial stability
Financial regulatory bodies
- Financial Policy Committee (FPC)
- Prudential Regulation Authority (PRA)
- Financial Conduct Authority (FCA)
Name the different types of money transmission (8)
- Faster Payments Scheme (£1 < x < £250,000)
- Electronic Funds Transfer EFT
- Banks Automated Clearing System BACS
- Clearing House Automated Payment System CHAPS
- Society for Worldwide Interbank Financial Telecomunication SWIFT
- Payment gateways
- Digital commerce platforms
-General clearing
What is fintech?
Financial technology
the use of technology to deliver financial services and products to consumers.
What are the types of bank/customer relationship for individuals and businesses?
- Receivable / payable
- Bailor / bailee
- Principal / agent
- Mortgagor / mortgagee
What are the customer’s duties to the bank?
- keep safe all the ways of accessing money
- tell the bank of any unathorised payments from their bank account
- not to disclose passwords, PINS, etc.
What are the rights of the bank?
- charge reasonable bank charges
- use the customer’s money in any way that is legal and morally acceptable
- to be repaid overdrawn balances
- to be indemnified against possible losses
What are Money Markets?
The money markets is a term that covers a vast array of markets buying and selling different forms of money or marketable securities
What are marketable securities?
Short-term highly liquid investments that are readily convertible into cash
Companies might use them to invest short-term surplus finance
Name the various types of money market financial instruments?
- Treasury bills
- Deposits
- Certificates of deposit
- Gilts
- Bonds
- Commercial paper
What is the inter-bank market?
market for very-short term borrowing, often overnight, between banks.
It is used to smooth fluctuations in the bank’s receipts and payments
The main benchmark interest rate for sterling is Sterling Overnight Index Average SONIA
A company can raise capital in the capital markets by issuing which securities?
- equity or ordinary share capital
- preference shares
- loan stocks or debentures
What is meant by the capital market?
The national and international markets in which a business may obtain the finance it needs for its short-term and long-term plans
Name the 6 capital markets listed in the workbook?
- National stock markets
- The banking system
- Bond markets
- Leasing
- Debt factoring
- International markets
What is equity?
represents the ordinary shares in a business
equity shareholdrs are the owners of the business and through their voting rights, exercise ultimate control
What are preference shares?
form part of the risk-bearing ownership of the business but, since they are entitled to their dividends before ordinary shareholders, they carry less risk
As their return is usually a fixed maximum dividend, they are similar in many ways to debt
What are loan stocks and debentures?
typically fixed interest rate borrowings with a set repayment date.
Most are secured on specific assets or assets in general such that lenders are protected
