C6 - Raising Finance Flashcards
Types of short term financing?
Bank overdraft
Factoring
Invoice discounting
Types of long term financing?
Bank loans
Leasing/hire purchase
Capital financing
What is a bank overdraft?
A facility between a bank and a customer which allows the customer to borrow a specified amount.
How is the interest rate calculated on a bank overdraft?
Calculated on a daily basis but only on the amount that is borrowed
What does it mean to be SECURED when using an overdraft facility?
A charge over the customers (small and medium companies) business or private assets or a guarantee.
What does a COMMITTED OVERDRAFT mean?
It is granted for a fixed period of time and is only repayable on demand if the borrower becomes insolvent.
Advantages of bank overdraft..
- good for short term financing
- only pay interest on borrowed amount
Disadvantages of bank overdraft..
- can be repayment on demand (only if seen to become insolvent)
- fixed interest rate which could vary over years
What is factoring in financing terms
A financial arrangement where a company sells its receivables (invoices) to a factoring company who will carry out the debt collection process for a company.
What is recourse factoring?
When the factoring company takes over someone’s invoices but DOES NOT include any irrecoverable debts.
What is non recourse factoring?
When the factoring company takes over invoices and any irrecoverable debts outstanding.
Advantages of factoring??
- no ties between the factoring company and employees of original company
- helps avoid bad debt through efficient debt collection
Disadvantages of factoring?
- expensive
- security may be required (assets to pay suppliers)
What is invoice discounting?
Similar to factoring -
When a finance company chases outstanding debt but does not take over the receivables of the company.
Advantages of invoice discounting?
- turns unpaid invoices into immediately available working capital
- enables better contact between company and customers
Disadvantages of invoice discounting?
- expensive
- need to maintain efficient sales ledger
- security may be required (assets against debt)
What is a bank loan?
A long term facility between a bank and a customer which allows the company to borrow money to a particular asset.
Usually between £1,000 - £250,000
Advantages of a bank loan
- repayment holiday (delay one off payment)
- granted for up to 10 years
Disadvantages of a bank loan
- security is required
- interest rates could vary if not set at a fixed rate which could increase payments