Debt based financing Flashcards
What is a loan covenant?
Follow same concept as general bank loans but have tighter stipulations within the agreement
What is a term loan?
opposing concept to loan covenant. for business that are more mature agree on amount to borrow take out that amount of money any time and interest is calcuated based on withdrawals flexible method
What is a loan note?
Sold by an entity at seperate units (like share captial)
investors invited to purchase stocks
traded on the stock exchange
fluctuate according to fortune of business and movement of interest rates
What is a convertable loan note?
Loan given by investor by which the investor is able to cash (convert) the loan to ordinary shares
Investor: good for start up as can reep beenfits derivied from success
Business: Could negotiate lower interest rate for the percieved benefit of succcess
debt becomes self liquidated
what is sale and leaseback
examples?
firm sells asset to institution
lease back
repayments are allowable against profits for taxation purposes
TESCO, DEBENHAMS, BOOTS AND M&S DO THIS
What are limitations to sale and leaseback?
oppotunity cost: lose out on high residual value by selling asset
May not be able to renew lease for the asset –> vlataile if its machinery in operating context
What are hire purchases?
same concept as monthly phone bill
upfront payment
monthly installments
Example of hire purchase
Stagecoach
carrying amoint £720m
£109m equated to hire purchase in feasable assets
Example of hire purchase
Stagecoach
carrying amoint £720m
£109m equated to hire purchase
Downsides to debt based financing
loan interest is a deduction from taxable profit
loans are classed as legally binding contracts
Whys is debt based financing cheaper than equity?
There is less risk entailed within debt financing which makes borrowing cheaper
