Debt Finance Flashcards
Chapter 5
What are the main types of debt finance?
Loans and debt securities. Loans include overdrafts, term loans, and revolving credit facilities. This text focuses on loans.
What is an overdraft facility?
A contract between a business and its bank that allows the business to go overdrawn on its current account. It is a temporary loan used for everyday expenses and is usually payable on demand.
What is a term loan?
A loan where a business borrows a fixed amount for a specified period and must repay it at the end of the term with interest. These are typically used to purchase capital assets.
What is a revolving credit facility?
A bank agrees to make available a maximum amount of money to the business throughout an agreed period. The business can borrow and repay money, and reborrow amounts already repaid up to the limit. This is a flexible type of loan.
What is a facility agreement?
The contract for a term loan or a revolving credit facility. It includes clauses regarding the loan amount, currency, type of loan, availability period, repayment schedule, interest rates, and covenants.
What is a covenant in a facility agreement?
A contractual promise by the business to do or not do something. Covenants ensure the business operates within agreed limits to increase the likelihood of full repayment of the loan. Examples are limitations of dividends, minimum capital requirements, and restrictions on the disposal of assets.
What is a debenture?
Generally, a written loan agreement between a borrower and lender that is registered at Companies House, giving the lender security over the borrower’s assets. Only companies and LLPs can enter into debentures.
Why grant security?
To lower the lender’s risk of not being repaid. If the borrower fails to repay, the lender can seize and sell the secured assets. The borrower may also benefit from a lower interest rate.
What is a mortgage?
A high form of security, usually over high-value assets, involving the transfer of legal ownership to the lender (except for land, which is a charge by deed). The lender has the right to take possession if the borrower defaults.
What is a charge?
A form of security that does not transfer legal ownership or give the lender immediate possession rights. There are two types of charges: fixed and floating.
What is a fixed charge?
A charge where the lender has control over the asset. The borrower can’t dispose of the asset without the lender’s consent. The fixed charge holder has the right to be paid first if the business becomes insolvent.
What is a floating charge?
A charge over a group of assets that constantly change, such as stock. The borrower can deal with the assets in the normal course of business until the charge ‘crystallises’.
What causes a floating charge to crystallise?
Events such as the chargor going into receivership or liquidation, ceasing to trade, or any other event specified in the charge document. Once crystallised, the chargor can no longer deal with the assets covered by the charge.
What is the priority of charges?
Generally, a fixed charge takes priority over a floating charge. If there are multiple fixed charges, the one created first takes priority if registered. The same applies to floating charges.
What is a negative pledge clause?
A clause in a floating charge document that prohibits the borrower from creating later charges with priority without the floating charge holder’s permission. Actual knowledge of this clause by a later lender will mean their charge is subordinate.
What happens if a charge is not registered?
The charge is void against a liquidator or an administrator of the company, and also against the company’s other creditors. The lender cannot enforce the security.
What is the process for registering a charge?
Within 21 days of creation, the company or a person interested in the charge must file a statement of particulars (form MR01), a certified copy of the charge and a fee at Companies House.
How can a company execute a contract?
By using the company seal or by a person acting under its authority, express or implied. This is often a director.
How can a company execute a deed?
By affixing its seal, or by the signatures of two authorised signatories or by a director in the presence of a witness. It must also be clear that it is intended to be a deed.
