Sources of Finance Flashcards
What is an overdraft?
Bank grants an overdraft facility (usually for a fee)
Why are overdrafts the most important source of short-term finance?
Can be arranged relatively quickly and offer a level of flexibility
Are overdrafts repayable on demand?
Yes
What is a short-term loan?
Drawn in full at the beginning of the loan period and repaid at a specified time or in defined instalments
What happens once a short-term loan is agreed?
The term of the loan must be adhered to, provided that the customer does not fall behind with their repayments
Is a short-term loan repayable on demand?
NO
What is trade credit?
Current assets may be purchased on credit. This represents an interest-free short-term loan
What is important to take into account for trade credit?
The loss of discounts suppliers may offer for early payment
Delays in payment and trade credit?
Worsens a company’s credit rating and additional credit may become difficult to obtain
What is a short-term lease?
An alternative to buying an asset outright
Why is short-term finance riskier?
May be more expensive at the point it is being reviewed. Therefore, it is more liekly that long-term finance is required over a longer time period
Where there’s a long-term investment being considered by a firm?
A strong argument for matching the term of investment to term of long-term finance
Why match term of investment to term of long-term finance
Returns being generated by investment may be required to repay debt
What happens when there’s a loan whose maturity date was longer than the term of investment?
Expose the company to a potentially unnecessarily long period over which interest repayments must be made
What is needed when obtaining a bank loan?
Present a convincing business plan
Provide security by either fixed/floating charge against firm’s asset or personal collateral
