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Sources of finance Flashcards

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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
Consideration re. delaying payments
Cost of refusing early payment discounts should be weighed against benefit of having extra capital
26
Consideration re. equity finance
Loss of control of company
27
Consideration re. retained earnings
Most common and important source of finance
28
Considerations re. preference shares
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
Considerations re. bonds and debentures
Secured (against collateral) or unsecured, redeemable or irredeemable (very rare now), convertible (into equity shares) or non-convertible
30
Consideration re. leasing
Sale and leaseback agreements
31
4 advantages - Bank and Institutional loans
Generally quick and straightforward access Unsecured loans are low risk Control of company is retained Good for budgeting as repayments are set out
32
4 advantages - Overdrafts
Very quick and easy to arrange Can typically be cleared anytime without penalty Control of company is retained Interest free period usually allowed
33
4 advantages - Debt factoring
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
4 advantages - Invoice discounting
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
Advantage of crowdfunding
Pool of investors much larger than with traditional sources
36
Advantage of P2P lending
Operates online, generally lower overheads
37
Advantage of invoice trading third-party platforms
No contract, set up or termination fees
38
3 advantages - Reducing inventories
Reduces costs associated with storage Frees up money tied up in inventory stock Reduces risk or deterioration, obsolescence and theft
39
2 advantages - Tighter credit control
Frees up cash Reduces cost of credit control and risk of bad debts
40
2 advantages - Delaying payments
Often viewed as 'free credit' If a business sells good before they have paid for them, savings on cost of collecting receivables
41
2 advantages - Sale of redundant assets
Raises finance from assets that are no longer needed No interest charges or dilution of control
42
3 advantages - Equity
Easily tradeable for an investor May enhance reputation Delivers confidence amongst investors and creditors
43
4 advantages - Retained earnings
Cheapest source of finance Immediately available No obligation to pay interest or return funds Use is very flexible
44
3 advantages - Preference shares
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
4 advantages - Bonds and debentures
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
4 advantages - Leasing
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
3 advantages - Private finance initiatives
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
4 advantages - Government grants and assistance
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
4 disadvantages - Bank and Institutional loans
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
4 disadvantages - Overdrafts
Annual maintenance fee Repayable on demand Failure to pay can damage credit status Larger facilities may be secured
51
3 disadvantages - Debt factoring
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
3 disadvantages - Invoice discounting
Fees charged decrease margins Gives appearance to stakeholders of finance struggles Only available on commercial invoices
53
Disadvantage of crowdfunding
Difficult to obtain crowdfunding for most businesses
54
Disadvantage of P2P lending
Investors expect very good rates
55
Disadvantage of invoice trading third-party platforms
Fee charged per invoice
56
2 disadvantages - Reducing inventories
Increases possibility of stock-outs and dissatisfied customers Bulk purchase discounts may be unavailable
57
2 disadvantages - Tighter credit control
Risks losing competitive edge to business providing credit Potential loss of customers will in turn reduce sales and profit
58
3 disadvantages - Delaying payments
Reputational cost if breaching payment terms Potential loss of suppliers Suppliers may increase prices, or removal of incentives
59
3 disadvantages - Sale of redundant assets
Not always available Only a one-off source of finance May take a while to find buyers
60
2 disadvantages - Equity
Equity shares grant holders voting rights in the company Issue of ordinary shares may be unfavourable to existing shareholders
61
3 disadvantages - Retained earnings
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
3 disadvantages - Preference shares
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
3 disadvantages - Bonds and debentures
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
4 disadvantages - Leasing
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
3 disadvantages - Private finance initiatives
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
4 disadvantages - Government grants and assistance
Applications can be time consuming Difficult to qualify, and lots of competition Long waiting period Strict rules and conditions on use

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