C6 - Raising Finance Flashcards

1
Q

Types of short term financing?

A

Bank overdraft
Factoring
Invoice discounting

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2
Q

Types of long term financing?

A

Bank loans
Leasing/hire purchase
Capital financing

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3
Q

What is a bank overdraft?

A

A facility between a bank and a customer which allows the customer to borrow a specified amount.

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4
Q

How is the interest rate calculated on a bank overdraft?

A

Calculated on a daily basis but only on the amount that is borrowed

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5
Q

What does it mean to be SECURED when using an overdraft facility?

A

A charge over the customers (small and medium companies) business or private assets or a guarantee.

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6
Q

What does a COMMITTED OVERDRAFT mean?

A

It is granted for a fixed period of time and is only repayable on demand if the borrower becomes insolvent.

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7
Q

Advantages of bank overdraft..

A
  • good for short term financing

- only pay interest on borrowed amount

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8
Q

Disadvantages of bank overdraft..

A
  • can be repayment on demand (only if seen to become insolvent)
  • fixed interest rate which could vary over years
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9
Q

What is factoring in financing terms

A

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.

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10
Q

What is recourse factoring?

A

When the factoring company takes over someone’s invoices but DOES NOT include any irrecoverable debts.

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11
Q

What is non recourse factoring?

A

When the factoring company takes over invoices and any irrecoverable debts outstanding.

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12
Q

Advantages of factoring??

A
  • no ties between the factoring company and employees of original company
  • helps avoid bad debt through efficient debt collection
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13
Q

Disadvantages of factoring?

A
  • expensive

- security may be required (assets to pay suppliers)

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14
Q

What is invoice discounting?

A

Similar to factoring -

When a finance company chases outstanding debt but does not take over the receivables of the company.

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15
Q

Advantages of invoice discounting?

A
  • turns unpaid invoices into immediately available working capital
  • enables better contact between company and customers
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16
Q

Disadvantages of invoice discounting?

A
  • expensive
  • need to maintain efficient sales ledger
  • security may be required (assets against debt)
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17
Q

What is a bank loan?

A

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

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18
Q

Advantages of a bank loan

A
  • repayment holiday (delay one off payment)

- granted for up to 10 years

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19
Q

Disadvantages of a bank loan

A
  • security is required

- interest rates could vary if not set at a fixed rate which could increase payments

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20
Q

What is a capped interest rate?

A

When interest rates which includes a maximum rate quoted in the facility letter.

21
Q

Differences between overdraft and loan?

A
  • overdraft is a variable amount which has a limit set by banks and loans are a fixed amount of money borrowed from the bank.
  • overdrafts have higher interest rates than loans
  • overdrafts are for short term financing and loans are for long term financing.
22
Q

What is a commercial mortgage

A

A loan for up to 25 years to cover the purchase of property.

23
Q

Long term financing - what is a lease?

A

An arrangement where the owner of the asset (lessor) gives someone (the lesser) permission to use and the possession of that asset for a specified period of time in return for monthly lease payments.

24
Q

What is an operating lease?

A

Short term financing where the lessee makes repayments for an asset such as a car but does not take ownership at the end of the period.

25
Q

What is a financing lease?

A

Long therm financing where lessee makes repayments every month and then all the risks and rewards of ownership are transferred to the lessee at the end of contract.

26
Q

What is hire purchase?

A

A type of finance lease where the user will make regular repayments for the asset and take ownership of the asset at the end of the period for a small sum

27
Q

Should an operating lease be displayed on the balance sheet?

A

No - the company does not own the asset, it just makes regular payments to borrow the asset.

However, should be displayed in the P&L as an expense to the lessor

28
Q

Should finance leases be displayed on the balance sheet of a company?

A

Yes - the asset is recorded at the lower of fair value and the present value of minimum lease payments.

Interest paid and depreciation should be displayed on the P&L

29
Q

How does an operating lease effect gearing?

A

It has no efffect as it’s not displayed in the financial statements

30
Q

How does finance leasing affect gearing?

A

This will increase the gearing ratio which has a negative impact on the company.

31
Q

What does sale and lease back meaning in terms of long term financing?

A

When a company sells their assets and then leased back on a long term basis.
This company will no longer own the asset but doesn’t have responsibility of maintaining the asset.

32
Q

What are equity/ordinary shares?

A

They represent the investment made by individual investors in the company.

33
Q

What are preference shares?

A

They also represent the investment made by individuals in the company and carries preferential rights on the matters of payments of dividends.

Does not confer voting rights at company meetings

34
Q

How does equity shares effect gearing?

A

This will increase equity which will then decrease the overall gearing percentage.

35
Q

How will preference shares, loan stock and bonds affect gearing?

A

They are treated as a non current liability on FS and will therefore increase the gearing of the company.

36
Q

How to calculate the interest on overdrafts?

A

Average overdraft amount £

X

Average annual interest rate %

37
Q

How to calculate flat rate interest?

A

P (principle) X R (interest rate) X T (time)

38
Q

What is annual percentage rate??

A

A formula that calculates the interest on the outstanding balance which is reducing each year and includes fees.

39
Q

What is an arrangement fee?

And how is it calculated on a loan.

A

A one off fee charged for setting up the loan.

A fixed percentage of the total amount borrowed

40
Q

How is an arrangement fee calculated for overdrafts?

A

A fixed percentage charged of the overdraft limit which is the amount you can borrow.

Renewal fee may also be included at the end of the 12 months.

41
Q

Does overdrafts or bank loans carry a higher interest rate?

A

Overdrafts have a higher interest rate but is only based on borrowed amount not the total facility allowed.

42
Q

What are overdrafts better for?

A

Short term financing for things such as working capital

43
Q

How is the interest cost calculated?

A

Average overdraft X average annual interest rate %

44
Q

What is flat rate interest?

A

A sum of money payable on top of the loan which is calculated on the total borrowed amount over the whole period of the loan and ignores repayments

45
Q

What is an apr interest rate

A

A more accurate way of comparing the costs of borrowing by taking into account the reducing balance of the loan and any repayments.

46
Q

What is a simple rate and a compound rate?

A
Simple = flat rate 
compound = apr rate
47
Q

What fee is included when considering finance?

A

Arrangement fee

48
Q

How is arrangement fees calculated on loans?

A

Fixed percentage of the total amount borrowed. This is a one off payment which is payable at the start of the loans

49
Q

How is arrangement fees calculated for overdrafts?

A

A fixed percentage based on the maximum amount allowed even if the maximum amount is not required.
A renewal fee may also be payable at the end of the 12 months