Debt Finance (3) Flashcards
What is a bill of exchange?
An acknowledgement of a debt to be paid on a stated date
What does an exporter typicall require in international trade?
Requires a customer to accept a bill before releasing documents of title to the goods
What may an exporter do in a bill of exchange?
Hold the bill to maturity
“Discount” the bill with a bank to receive cash earlier
What is a commercial paper?
Short-term unsecured debt issued by high-quality companies. Paper can be traded by investors on the secondary market
When is commercial paper appropriate?
For financing short-term liabilities
Advantages of commercial paper?
Large sums can be raised relatively cheaply.
No security is required
Disadvantages of commercial paper?
Only available to large companies with investment-grade credit ratings.
What are short-term bank loans?
A short-term cash injection can help companies in need of working capital
How long are short-term bank loans?
From 3 months to 1 year
What are the advantages of short-term bank loans?
Available to most companies
Typically unsecured
Short-term interest rates are usually lower than long-term interest rates
When are short-term interest rates usually lower than long-term interest rates?
Due to lower credit risk on short-term debt
What are disadvantages of short-term bank loans?
Arrangement fees may be high when expressed as an annual effective cost
Refinancing risk
What is a refinancing risk?
Every time a short-term loan matures, the borrower faces the risk that it cannot be easily replaced or refinanced, or that interest rates have risen
What are sources of debt finance for SME?
Trade credit
Factoring and invoice discounting
Leasing is useful for SME
Bank finance (typically an overdraft or longer-term loans)
What are government loan guarantee schemes?
Government may choose to act as guarantor for commercial loans to SMEs
