7.10 Debt and Security Flashcards
What are the two main ways that a company raises finance
Debt finance and equity finance
What is debt finance
By loans, mortgages, securities or charges
What is equity finance
by issuing shares - gives shareholders ownership of the business
What are the benefits to a company using an overdraft
use interest
provide a quick short term loan idea to generate revenue
What is a term loan
Simple way to obtain money, payable at the end of the a set term
What is a Revolving credit facility (RCF)
An RCF is a hybrid of an overdraft and a term loan. It is similar to a term loan, but it is not for a
fixed amount. With an RCF, the borrower can draw down and repay amounts (up to a preagreed maximum) whenever it wants
Name the different types of securities lenders can issue
Mortgages
Charges
a pledge
a lien - physical possession
What is the most secure form of security
mortgage - keep the asset
What is a fixed charge
right to obtain a specific identifiable asset, if the borrower goes into liquidation the lender has a right to the asset
What is a floating charge
A floating charge floats over a class of assets that fluctuates, such as stock which is frequently
changing. If the borrower goes into liquidation the lender has a right to the asset
After a charge has been created what are the steps
Form MR01 and the certified copy of the charge must be sent to Companies House with 21
days of the day after the day the charge was created (s 859A(4)), together with a fee.
What happens if a charge is incorrectly registered
If a company goes insolvent an incorrectly registered charge will be void against a liquidator
A fixed charge takes priority over a floating charge if created afterwards unless
The floating charge has been protected by a negative pledge
What must be completed with a negative pledge
section Form MR01 must be completed
What does a negative pledge do
A negative pledge in a floating charge prohibits a company from creating later charges with
priority over a floating charge, without the floating-charge holder’s permission. Thus, a
subsequent lender taking a charge over the same asset with actual notice of the negative
pledge will rank behind the original charge holder (in priority).
What takes priority a fixed charge or floating charge?
Fixed charge unless a negative pledge is included in the floating charge documentation
If there is more than one fixed charge over an asset, which one takes priority and how it is determined
By order of creation ie. the date the charge was created rather than registration
the same applies to both fixed and floating charges
What is crystallisation?
Crystallisation is the process by which a floating charge converts
into a fixed charge and this will happen on a specified event such as when the borrower:
* defaults on the terms of the loan (as specified in the loan document), or
* becomes insolvent.
