Debt Finance (2) Flashcards
What are bank loans?
Companies agree borrowings from the bank at a fixed rate, for a specified period and with an agreed repayment schedule
Advantage of bank loans?
As the loan is for a fixed term, there is no risk of early recall
Disadvantages of a bank loan?
Inflexible.
May require security.
May require covenants
What are covenants?
Restrictions on the company
What is leasing?
the lessee has the right to use an asset which is owned by the lessor, in exchange for a series of payments
Advantages of lease payments?
There are many willing providers
Matches finance to the asset
Very flexible packages available
Disadvantages of lease packages?
May be expensive
What is a sale and leaseback?
A company sells property to an institution, such as a pension fund, and then leases it
Advantages of a sale and leaseback?
Generate short-term cash
Disadvantages of a sale and leaseback?
Company no longer owns the property
Future borrowing capacity of the company will be reduced
Net effect is equivalent to secured borrowing
How does sale and leaseback affect gearing?
It increases it as a right-of-use asset will be capitalised (potentially at a higher amount than the carrying amount of the leased asset) and a lease liability recognised.
What is a mortgage loan?
A loan secured by property
Advantages of a mortgage loan?
Loan will have a lower rate of interest than other debt
Institutions will be willing to lend over a longer term
Company can still participate in the growth of the property’s value
Disadvantages of a mortgage loan?
Likely to be restrictive covenants concerning the use of the property and its potential disposal
The bank may force the sale of the property to recover the loan if there’s a default
What is a bank overdraft?
A borrowing facility associated with a current account
