Credit Products & Services II Flashcards
What is a Hire Purchase?
What are its advantages?
An agreement to hire an asset with an option to purchase.
Advantages include:
- small initial outlay
- easy to arrange
- certainty - the loan cannot be called in providing the terms are kept
- availability when, for example, bank finance is not
- fixed rate finance
- tax relief - interest payments are tax deductible and the asset may also be subject to a writing down allowance
What are disadvantages to a Hire Purchase?
- More expensive than a cash purchase
- The fixed term means it may be impossible or expensive to make early termination
What is Leasing?
What types are there?
Leasing is similar to hire purchase but the lessee never becomes the owner. It can be a
- Direct Lease - lessor buys desired asset and leases it
- Sale and Leaseback - company sells asset to finance company who leases it back
The two types are:
- Operating lease - commits the lessee to only a short term contract that can be terminated at short notice. Usually the lessor pays for repairs, maintenance etc.
- Finance lease - the lessor expects to recover full cost of equipment and interest over period of lease. Usually the lessee has not cancellation right.
What are the advantages to leasing?
- Availability when, for example other sources are not
- Tax advantages, e.g. rental payments under an operating lease are tax deductible, as is interest under a finance lease
- The depreciation charge for a finance lease is tax allowable, dependent on the method of depreciation used and HMRC acceptability
- The obsolescence risk is transferred to the finance provider under an operating lease
What is Factoring?
Factoring is the raising of funds against the security of the company’s debts i.e. finance house (the factor) takes security over them. Services include:
- Provision of finance - The factor will advance up to 80% of the value of debts immediately. When invoices are paid, the remaining 20%, less charges, is paid to the client
- Sales ledger administration - The factor dispatches invoices and ensures that they are paid
- Credit management - The factor provides insurance against bad debts
What is Invoice Discounting?
Where a company pledges selected invoices to a finance house and guarentees that they will be paid. i.e. selling the invoice.
The finance house remits up to 90% of the total invoice value to the company.
Give examples of available Grants or Loan Support.
- Regional Selective Assistance (RSA) - discretionary grants to encourage firms to locate or expand in ‘Assisted Areas’
- DTI Grants for Innovation, Research and Development - government encouragement of innovation, R&D
- European Investment Fund (EIF) - provide finance to institutions involved in SME funding
- European Structural Funds - supports social and economic growth accross EU
- Enterprise Finance Guarantee Scheme (EFG) - provides SME lenders with a govn guarantee against default
What is Franchising?
Franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trademark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assitance on a predetermined basis.
What are the benefits to the Franchisee?
- No need to come up with a new idea
- Well-established franchise operations will often have national advertising campaigns
- Good franchisors will offer comprehensive training programmes
- Assistance with determining the franchisee’s financial requirements
- Details of competitors readily available
- Group discounts from suppliers
- Assistance with problem solving
- Management support to measure progress, celebrate sucess and plan for the future
What are disadvantages to the Franchisee?
- Levels of sucess (or otherwise) can vary from sector to sector, business to business
- Consideration needs to be given to the strength of the brand or image and whether it is transportable over a wide area
- The product or service needs to be adaptable to reflect any shift in market demand, e.g. McDonalds have tried to change both their perception and their menu to reflect heightened awareness of a healthy diet
- Franchising is a medium to long term investment and initially it still requires a sizeable amount of finance to cover start-up costs, fees, etc.
What are the benefits to the Franchisor?
- Opportunity for a business with a proven product or service to sell, to expand rapidly without a prohibitive outlay of capital
- it can provide a broad distribution network and rapid market penetration
- High level of commitment from franchisees who have a stake in the business
- Benefit of the entrepreneurial skills which the franchise can introduce, resulting in a better performance than otherwise might have been acheived
What are the disadvantages of franchising to the Franchisor?
- Major problems can arise if the franchisees are poorly chosen or become resentful of existing arrangments
- The franchisor needs to ensure that firm management and monitoring systems are established and maintained
- The franchisor has no share in the equity of the franchisee’s business
Give examples of franshises.
- Avis
- the Body Shop International plc
- Prontaprint
- Spud U Like
- Thorntons
- McDonalds
What is Equity Finance?
The raising of equity finance involves the owner giving up a share of the business in exchange for an investment in the business. Only available to limited companies - the directors issue new shares to new investors in exchange for cash.
Equity finance can be raised through
- Business Angels
- Venture Capitalists.
What are the advantages to Business Angels?
- Security is not usually required
- On average the investment is from three to six years, enabling the formulation of long term planning
- Often provide support in the form of expertise or network contacts
