Debt Finance Flashcards
(43 cards)
What are the two main types of debt finance?
Loans and debt securities.
Do the model articles contain any restrictions on borrowing money?
No.
Although were incorporated before 1st October 2009, memorandum must be checked in order to it contains no restrictions on company borrowing money.
For a company incorporated prior to 1st October 2009, if the memorandum contains restrictions on borrowing how is this removed?
Shareholders must pass a special resolution to change the articles to remove the restrictions.
What is a secured loan?
A loan where the lender takes security over a certain asset or assets of a company.
In the event of default, the lender can therefore easily recover their funds by obtaining interests in the assets (ie appointing receiver to sell them).
What are the three main types of loans?
- Revolving credit facility;
- A term loan; and
- An overdraft.
What is an unsecured loan?
A loan where no security over assets of the company is given.
More risky for lenders so they often insist on higher interest payable on the instalments.
Explain the premise of an overdraft facility.
Contract between the business and its bank which allows the business to go overdrawn on its current account.
Good for medium and small sized companies and businesses.
They are a temporary type of loan used to cover daily expenses in the event of cash flow issues.
The bank can demand payment of the entirety of the overdrawn amount at any time (usually not exercised unless business is in severe financial difficulties).
Business pays fee for overdraft facility. Bank also charges interest (generally on a compound basis).
Defined compound interest.
Any interest which is unpaid will be added to the capital (amount borrowed) and interest is charged on that whole amount.
What is a term loan?
A specific amount of money, repayable at the end of a specified term.
Interest is payable at regular intervals.
Term loans may be secured or unsecured.
It may allow the company to take the funds in one go, or in instalments.
What is the main advantage of taking a term loan in instalments?
This will reduce the amount of interest payable.
What is the main advantage of taking a term loan?
It gives greater certainty than an overdraft (which his repayable on demand) and borrower has greater control as lender can only ask for repayments in accordance with the contract.
Give the disadvantages of a term loan.
Time and expense negotiating and agreeing legal documentation.
Once repaid, money can’t be re-borrowed (ie its a one time only loan).
What is a revolving credit facility?
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 the money.
Interest is payable at regular intervals.
The business can re borrow amounts that it has already repaid (as long as it does not exceed the maximum amount which has been agreed).
Useful for businesses that have income which is not evenly distributed throughout the year.
RCFs can be secured or unsecured (but they are usually secured).
What is a syndicated loan?
Usually applies to high value loans (where risk is too great to be taken by one lender).
Multiple banks lend to the borrower under the agreement.
What is the advantage of a RCF?
Flexible means of borrowing money where it is possible to reduce the interest payable by reducing borrowings.
What is a bilateral loan?
A loan which is made between the borrower and the lender only.
Explain the terms in a loan agreement which sets out the payment of money to the borrower.
Initial clauses of the facility agreement will set out:
1) amount of the loan;
2) the currency;
3) the type of loan (eg term loan or RCF);
4) availability periods during which loan can be taken out (for an RCF this will usually be the entire length of the RCF).
Explain the terms in a loan agreement which sets out the repayments and prepayments of the loan.
Sets out when and how the lender can demand repayment.
It will set out the agreed repayment schedule for the loan, and may provide for:
- repayment of the whole loan in one go at the end of the term (bullet payment);or
- repayment in equal instalments over the term of the loan (amortisation); or
- repayment in unequal instalments, with final instalment being the largest (balloon repayment).
Explain the terms in a loan agreement which sets out the interest rates.
Rate payable for the loan is to be agreed between the parties (ie there is no statutory control).
Rate will therefore be expressly stated in the agreement.
It may be fixed for the period of the loan, or could be variable (ie a floating interest rate) altered at specific intervals in the term, by reference to a formula which is intended to maintain the lender’s profit on the loan.
Explain events of default clauses.
They set out circumstances where, if breached, the borrower will be in default and the lender may terminate the agreement.
Common default events include:
- non payment;
- commencement of insolvency procedures;
- or breaches of other various obligations under the agreement which the parties agree would default the loan.
Can sole traders or partnerships grant both fixed and floating charges?
No. They can only grant fixed charges.
Can LLPs grant both fixed and floating charges?
Yes.
What should a lender do when considering taking security in respect of a loan they are going to grant?
They should check on companies house to see if there are any other charges. If there are, it will be important to establish where their security would rank in the order of priority.
If they are taking security over IP rights (eg a trademark) they should check the company’s title to the intellectual property at the IPO.
Lender should also conduct a winding up search by telephone at the Companies Court to check no insolvency proceedings have been commenced against the company
List the assets which a company can grant security over?
1) Land (whether freehold or leasehold) fixtures and fittings;
2) Tangible property (eg machinery, stock etc);
3) Intangible property (eg money in bank accounts, debts owed, IP rights etc).