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yes then > Sources of finance > Flashcards

Sources of finance Flashcards

1
Q

5 types of external short-term finance

A

Bank and Institutional loans

Overdrafts

Debt factoring

Invoice discounting

Alternative financing

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2
Q

3 sources of internal short-term finance

A

Controlling WCC by……

Reducing inventories
Tighter credit control
Delaying payments

Sale of redundant assets

Retained earnings

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3
Q

9 sources of long-term finance

A

Equity

Retained earnings

Preference shares

Bonds and debentures

Bank and institutional loans

Leasing

Securitisation of assets

Private finance initiatives

Government grants and assistance

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4
Q

Define - Overdrafts

A

Pre-agreed facility provided by banks and financial institutions

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5
Q

Define - Debt (invoice) factoring

A

Financial arrangement whereby business sells trade receivables at a price lower than realisable value to third party (the factor) who collects money

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6
Q

Define - Invoice discounting

A

Cash is borrowed from financial institutions against invoices raised with customers - 80% within 24 hrs

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7
Q

When is sale of redundant assets short-term

A

Short term would be sale of equipment or vehicles, not land or property

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8
Q

Define - Equity

A

Ordinary shares

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9
Q

Define - Retained earnings

A

Equity finance in the form of distributable profits attributable to equity shareholders

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10
Q

Define - Preference shares

A

Shares with preferential rights to dividends

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11
Q

Define - Bonds and debentures

A

Bond = general term for various types of long term loans

Debenture = most common form of long term loan, fixed rate of interest, fixed date of repayment

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12
Q

Define - Leasing

A

A financier purchases an asset to then lease back to the company

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13
Q

When is a bank loan short term

A

Less than 1 year = short term loan

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14
Q

3 types of alternative financing

A

Crowdfunding

Peer-to-peer lending

Invoice trading third-party platforms

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15
Q

What are Private finance initiatives

A

Means of obtaining private finance for public sector projects

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16
Q

Define - Government grants and assistance

A

Financial support generally with fixed terms and conditions on use

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17
Q

3 considerations re. bank loans

A

Rate of interest and security will depend on risk and credit standing of co

If the loan is secured, cos assets are at risk if they fail on repayments

Will be conditional on loan covenants (conditions/constraints that company must meet)

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18
Q

2 considerations re. overdrafts

A

Will size of overdraft be substantive

Interest rate will depend on BoE

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19
Q

Two types of debt factoring

A

With resource - borrower maintains responsibility and collects from customers

Without resource - factor is responsible and in control of collection

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20
Q

Consideration re. invoice discounting

A

Management must be wary not to lose focus on improving admnistrative aspect of collections

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21
Q

Define - Crowdfunding

A

Raising money via internet, often in exchange for reward such as early receipt of product

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22
Q

Define - Peer-to-peer lending

A

Borrowing money from a collection of private investors

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23
Q

Define - Invoice trading third-party platforms

A

Invoice factoring, but with individual invoices

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24
Q

Consideration re. reducing inventories

A

EOQ important - great if it can be worked into answer

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25
Q

Consideration re. delaying payments

A

Cost of refusing early payment discounts should be weighed against benefit of having extra capital

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26
Q

Consideration re. equity finance

A

Loss of control of company

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27
Q

Consideration re. retained earnings

A

Most common and important source of finance

28
Q

Considerations re. preference shares

A

Legally equity, but treated as debt rather than equity for accounting purposes due to fixed rate of dividend

May be convertible or non-convertible, redeemable or irredeemable, participating and non-participating

29
Q

Considerations re. bonds and debentures

A

Secured (against collateral) or unsecured, redeemable or irredeemable (very rare now), convertible (into equity shares) or non-convertible

30
Q

Consideration re. leasing

A

Sale and leaseback agreements

31
Q

4 advantages - Bank and Institutional loans

A

Generally quick and straightforward access

Unsecured loans are low risk

Control of company is retained

Good for budgeting as repayments are set out

32
Q

4 advantages - Overdrafts

A

Very quick and easy to arrange

Can typically be cleared anytime without penalty

Control of company is retained

Interest free period usually allowed

33
Q

4 advantages - Debt factoring

A

Non-resource allows for insurance against bad debts

Immediately available

Non-resource eases credit control administration

Other sources of finance remain open for use elsewhere

34
Q

4 advantages - Invoice discounting

A

Very quick (24 hours)

Accelerates cash flow from customers, therefore allowing further credit sales

No non-current assets are used as collateral

Confidentiality is maintained

35
Q

Advantage of crowdfunding

A

Pool of investors much larger than with traditional sources

36
Q

Advantage of P2P lending

A

Operates online, generally lower overheads

37
Q

Advantage of invoice trading third-party platforms

A

No contract, set up or termination fees

38
Q

3 advantages - Reducing inventories

A

Reduces costs associated with storage

Frees up money tied up in inventory stock

Reduces risk or deterioration, obsolescence and theft

39
Q

2 advantages - Tighter credit control

A

Frees up cash

Reduces cost of credit control and risk of bad debts

40
Q

2 advantages - Delaying payments

A

Often viewed as ‘free credit’

If a business sells good before they have paid for them, savings on cost of collecting receivables

41
Q

2 advantages - Sale of redundant assets

A

Raises finance from assets that are no longer needed

No interest charges or dilution of control

42
Q

3 advantages - Equity

A

Easily tradeable for an investor

May enhance reputation

Delivers confidence amongst investors and creditors

43
Q

4 advantages - Retained earnings

A

Cheapest source of finance

Immediately available

No obligation to pay interest or return funds

Use is very flexible

44
Q

3 advantages - Preference shares

A

Dividends only payable if sufficient distributable profits, unlike interest

There is no loss of control

The shares are not secured on the company’s assets

45
Q

4 advantages - Bonds and debentures

A

Fixed RoI (usually at less than dividend) and date of repayment

Interest paid is tax allowable

No restrictions on use in company law

No loss of control

46
Q

4 advantages - Leasing

A

Cash outflow spread out over several years, avoiding need to pay outright

Considered as operating expenses and are tax deductible

Expenses remain constant or grow in line with inflation

Right to purchase remains at the end of agreement, but flexibility to withdraw if asset becomes obsolete (eg. Tech)

47
Q

3 advantages - Private finance initiatives

A

Public sector does not have to fund projects at commencement, such as by raising taxes

Public obtains valuable operational and management expertise from private sector, and transfer of skills between secs

Bidding processes encourage competition for design and quality of delivery

48
Q

4 advantages - Government grants and assistance

A

Cheap form of support, with low interest rates

Grants do not have to be repaid

Information is easily accessible

Projects are beneficial to society and public at large

49
Q

4 disadvantages - Bank and Institutional loans

A

High interest rates on ST loans, compounding debt problems

May be difficult to meet loan covenant leading to default

Extra charge for early repayment

Defaulting can damage credit status

50
Q

4 disadvantages - Overdrafts

A

Annual maintenance fee

Repayable on demand

Failure to pay can damage credit status

Larger facilities may be secured

51
Q

3 disadvantages - Debt factoring

A

Expensive - 2-4% of sales revenue

Visible if non-resource, potentially damaging relationships with clients

With resource - company still bears risk of bad debts and non payment

52
Q

3 disadvantages - Invoice discounting

A

Fees charged decrease margins

Gives appearance to stakeholders of finance struggles

Only available on commercial invoices

53
Q

Disadvantage of crowdfunding

A

Difficult to obtain crowdfunding for most businesses

54
Q

Disadvantage of P2P lending

A

Investors expect very good rates

55
Q

Disadvantage of invoice trading third-party platforms

A

Fee charged per invoice

56
Q

2 disadvantages - Reducing inventories

A

Increases possibility of stock-outs and dissatisfied customers

Bulk purchase discounts may be unavailable

57
Q

2 disadvantages - Tighter credit control

A

Risks losing competitive edge to business providing credit

Potential loss of customers will in turn reduce sales and profit

58
Q

3 disadvantages - Delaying payments

A

Reputational cost if breaching payment terms

Potential loss of suppliers

Suppliers may increase prices, or removal of incentives

59
Q

3 disadvantages - Sale of redundant assets

A

Not always available

Only a one-off source of finance

May take a while to find buyers

60
Q

2 disadvantages - Equity

A

Equity shares grant holders voting rights in the company

Issue of ordinary shares may be unfavourable to existing shareholders

61
Q

3 disadvantages - Retained earnings

A

Funds may not be sufficient at time required

Excessive savings may be misused against interests of shareholders

Devoting too much profit to long term growth may starve company of money it needs in short term

62
Q

3 disadvantages - Preference shares

A

Dividends are not tax allowable, and are hence rarely used

Pay higher rate of interest than debt due to extra risk

Rank before ordinary shares on liquidation

63
Q

3 disadvantages - Bonds and debentures

A

Holders are creditors and have first right to assets on winding up

Interest payments made regardless of p/l

Adds to debt finance and worsens gearing ratio

64
Q

4 disadvantages - Leasing

A

Lessee does not become owner despite paying significant money towards asset

Payments can become a burden if asset does not serve original purpose

Treated as debt by investors, therefore more difficult to access other finance

Co will not benefit from appreciation, eg. Land

65
Q

3 disadvantages - Private finance initiatives

A

Costs for public projects are considerably higher than comparable projects, often overrunning the budget

Public sector may lose control but remains ultimately responsible for value for money

Administrative costs associated with bidding process, advisers and lawyers are high

66
Q

4 disadvantages - Government grants and assistance

A

Applications can be time consuming

Difficult to qualify, and lots of competition

Long waiting period

Strict rules and conditions on use

yes then (10 decks)

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