Debt Financing Options Flashcards
What is a mortgage?
A mortgage is the highest form of security, where a lender takes a legal interest in property (e.g., land, buildings, ships, shares) as collateral for a loan. The borrower retains possession, but legal ownership is transferred to the lender until repayment.
What are the lender’s rights under a mortgage?
The lender (mortgagee) has:
The right to possession of the secured asset.
The right to sell the asset if the borrower defaults.
The ability to enforce security over the asset before unsecured creditors
What is a fixed charge?
A fixed charge is a type of security where the borrower pledges specific assets (e.g., machinery, shares) to the lender. The borrower cannot sell or transfer the asset without the lender’s permission.
A fixed charge must be registered at Companies House under s. 859A Companies Act 2006. The lender gets first priority over the asset in case of insolvency.
What is a floating charge?
A floating charge is a security over a group of changing assets (e.g., stock, receivables). The borrower can freely trade or use these assets until the charge “crystallises”.
A floating charge crystallises (becomes fixed) when:
The company goes into liquidation.
A receiver is appointed.
The company ceases to trade.
What is an overdraft ?
An overdraft is a short-term credit facility that allows a business to withdraw more money than it has in its bank account, up to a set limit.
Overdrafts are uncommitted facilities, meaning the bank can demand repayment at any time without prior notice.
What is a term loan?
A term loan is a loan for a fixed amount, taken for a set period (short-term: up to 1 year, medium-term: 1–5 years, long-term: over 5 years).
A term loan may be secured or unsecured, with terms set out in a loan agreement defining repayment schedules, interest rates, and lender rights.
What is a revolving credit facility (RCF)?
A revolving credit facility allows businesses to borrow, repay, and borrow again up to an agreed limit, similar to a credit card.
