Unit 5 – Debt Finance Flashcards
How is interest paid on an overdraft?
1) Compound basis – Any unpaid interest is added to the capital (amount borrowed) and interest is charged on the whole amount.
2) Implied into the overdraft
Is an overdraft an ‘uncommitted facility’ and what does this mean?
Yes – that it will be payable on demand. The bank can demand immediate repayment by the business at any time without giving notice.
Advantages / disadvantages of overdraft as debt finance?
- Advantages = Flexible source of finance with few formalities to arrange it.
- Disadvantages = Overdrafts are an expensive way to borrow as it is usually unsecured, and the banks charge high interest rates in return for offering flexibility to the borrower.
What is a term loan?
- In a term loan, the business borrows a fixed amount of money for a specified time (i.e., term) at the end of which it must all be repaid.
When is a term loan considered long-term?
Over 5 years.
What is a bilateral loan?
Between two parties (e.g., business and a bank)
What is a syndicated loan?
Between business and multiple lenders – spreads the risk when the amount of the loan is high.
What does “draw down” mean?
Take out the loan.
Advantages / disadvantages – term loans
- Advantages = Gives greater certainty than an overdraft (which is repayable on demand) and the borrower has greater control because the bank can only request repayment under the terms of the contract.
- Disadvantages = Time and expense in negotiating and agreeing all the legal documentation. Once the loan is repaid, the money cannot then be re-borrowed by the business.
Revolving credit facility is …
- The bank agrees to make available a maximum amount of money to the business throughout the agreed period of the revolving credit facility.
- During the lifetime of the facility, the business can borrow and repay money. Interest is payable at regular intervals.
- The business can also reborrow amounts that it has already repaid, so long as it does not exceed the overall maximum figure (i.e., like a revolving door).
When are revolving credit facilities used?
Businesses whose income is not evenly distributed throughout the year.
Advantages / disadvantages revolving credit facility
- Advantages = Flexible and possible to reduce the total amount of interest payable by reducing borrowings.
- Disadvantages = Time & expense in negotiating legal documentation.
What is a committed facility?
once the loan agreement has been signed, the bank must provide the business with the loan monies when it requests them.
E.g., revolving credit facility and term loans.
What are the different types or re-payment of a loan?
The facility agreement will set out the agreed repayment schedule for the loan. It may provide for repayment:
(a) of the whole loan in one go at the end of the term (a ‘bullet’ payment); or
(b) in equal instalments over the term of the loan (‘amortisation’); or
(c) in unequal instalments, with the final instalment being the largest (‘balloon repayment’).
When are revolving credit facilities paid back?
towards the end of the period. Term loans are likely to be spread out.
How is interest dealt with in a loan? Is there statutory control?
No statutory control – always dealt with in the agreement.
When can a covenant be implied into the loan agreement?
- A contractual term would only be implied if:
1) It were necessary to give business efficacy to the contract; or
2) if the term is so obvious that ‘it goes without saying’.
The court could not imply a term that was inconsistent with an express term of the contract.
Who can enter into a debenture?
ONLY companies and LLPS.
Can general partnerships and sole traders enter into a debenture?
no.
What constitutes ‘security’?
any mortgage, charge, lien or other.
Can sole traders & general partnerships grant floating charges over their assets?
No. Only fixed charges.
Can LLPs grant floating charges as well as fixed charges ?
Yes.
Before the lender agrees to a secured loan, what should they check?
No prior charges on the assets.
– Companies House
– Value the asset
For a charge over an asset what is the Registrar of Companies required to do?
Registrar of Companies must include a certified copy of the instrument creating the charge in the register, which is open to inspection by any person.