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15 Cards in this Set
- Front
- Back
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What are the 3 types of of short-term debt finance? |
1. Factoring 2. Commercial Bills 3. Overdraft |
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What is Factoring? |
Selling accounts receivable at a discount to a finance company - Usually at a 90% discount |
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What are some advatages / disadvantages of Factoring? |
- Receive money immediately (A) - Don't have to waste time chasing debts (A) - Only receive 90% of your AR which affects profits (D) |
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List some features of a Commercial Bill |
- Short term loan for larger amounts (e.g. $100k+ - Business receives funds immediately - Repaid in full (with interest) at end of loan period - Secured against business assets |
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List some features of an Overdraft |
- Allow business to 'overdraw' bank account (like a credit card) to a set limit - Assist with liquidity - very common method to help with cash flow issues |
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What are the 4 types of long term debt finance? |
1. Mortgage 2. Unsecured notes 3. Debentures 4. Leasing |
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List some features of a Mortgage |
- Secured against assets of business (usually property) - Usually for a new premises, factory or office - Repaid with interest over a long period of time |
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List some features of a Debenture |
-Issued by a public company to general investors - The investor invests for a fixed period of time at a fixed interest rate - Relatively low risk for the investor as secured against the assets of the business – Investor has no ownership of business and gets same interest rate (return) regardless of company performance |
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List some features of a Lease |
- Allows the business to use (rent) an asset for a fixed period of time - Typically used for cars, computers and office equipment- - Financial lease: longer period of time and the business owns the asset at the end - Operational lease: shorter period of time and the business never owns asset |
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List some features of an Unsecured Note |
- Similar to a debenture, but not secured by the company’s assets (so higher risk to the investor) -Due to risk the business must offer investors a higher rate of interest to attract them |
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At the highest level, what are the three sources of finance available to a business? |
1. Debt (external) - Short term (3) and long term (4) 2. Equity (external) - Ordinary shares and private equity 3. Equity (internal) - Owners Equity and Retained Profits |
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List some features of issuing ordinary shares as a source of finance |
- Company becomes ‘public’ and is floated on ASX - Investors can vote at AGM and receive dividends (profits) - Original business owners lose some control |
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List some features of using private equity as a source of finance |
- Shares are issued to selected investors but the company remains 'private' - Usually done to fund business expansion |
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Where do funds come from if Owners Equity is used as a source of finance? |
- Funds contributed by owners - Funds can also come from partners or issue of private shares |
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How are Retained Profits utilised as a source of finance? |
- Profits or earnings are kept (retained) and reinvested into the business - Australian public companies usually retain around 50% of profits |
