Lending Products Flashcards
Topic 4
Name some most common lending products
Overdrafts Factoring and invoice discounting Loans Asset finance Credit and charge cards
What 3 categories do lending products fall into
Providing short term liquidity for cash flow
Financing the purchase of assets
Covering contingent liabilities
When could a cashflow problem inccur
When money has to be paid out before payments owed are received
What is hardcore debt
If a bank account doesn’t return from debit to credit during the period of a month
Advantages of an overdraft
Borrowers only.pay interest when overdrawn
Bank can review and adjust the level of the overdraft facility
Facility is quick and easy to obtain
Disadvantages of an overdraft
Overdrafts do not provide a discipline in terms of repayment
Business can become reliant on overdrafts
Overdraft funding is provided on demand which means the bank can remove the facility at any time
Overdrafts may mask difficulties the business is experiencing
Two forms.of sales financing
Factoring
Invoice discounting
What is debt factoring
A business selling its invoices (money that is owed to it) to a factoring company
What is recourse factoring
With recourse factoring the factor does not assume the risk of bad debtors. They will reclaim their money from the business if the customer doesn’t pay
Wwhats non recourse factoring
With non recourse factoring the factor takes on the bad debt risk. The factor could take legal action against the customer for payment
Advantages of factoring/ invoice discounting
Ideal way to fund rapid growth in sales
Improve cashflow
Help to smooth cashflow and assist with financial planning
Useful info about the credit standing of customers can be obtained
Protection from bad debts with non recourse
What is invoice discounting
The diiscounter will first check the business its systems and customers. It will review the credit history and profit track record of the business. The discounter will then agree to advance a % of the total approved sales ledger
Disadvantage of factoring/ discounting
Cost involved can mean reduced profits
May reduce scope of traditional borrowing
It’s not suitable for some businesses/ sectors
Providers will want to vet customers
What is short medium and long term for loans
Short < 1 year
Medium 1 - 7 years
Long > 7 years
