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Chapter 10 Sources of Short Term Finance (External (Alternative Finance…
Chapter 10
Sources of Short Term Finance
External
Overdraft
pre-arranged facility to allow withdrawal of money in excess of account's credit balance
Common for SMEs
Back up form of financing
fixed period or rolling facility
cost = annual maintenance fee + interest
charged daily
variable interest rate
London Interbank Offered Rate (
LIBOR
)
average rate at which selected leading bank are prepared to lend to one another
no penalty for early repayment
Advantages
Immediate access to money
Company maintains control
usually not included in calculation of financial gearing
Disadvantages
unpredictable interest
higher rate of interest for using unauthorised facility
larger facilities often need to be secured
Loans
Fixed amount of money borrowed for a fixed amount of time
Unsecured
Higher risk for lender
Higher interest paid
Secured
Accs Receivable
Inventories
security seized if loan not paid
Disadvantages
term loan conditional on loan covenant
restrictive clause in loan agreement
restrict ability to take additional debt
maintain debt or working capital ratios at certain level
regular management reports
Higher interest rate than long term
extra charge for early repayment
Advantages
more flexible than other forms of finance
i.e. pay interest only and full loan at term end
negotiable terms
quick access to money
credit history not as important as with long term l.
predictable
fixed payments during the year
Control stays with company
Bills of Exchange
Debt Factoring
Invoice Discounting
Alternative Finance
Crowdfunding
Peer-to-Peer Lending
Invoice Trading Third Party Payment
Line of credit
revolving account that let borrowers draw, repay and draw again up to a certain limit
i.e. credit card
Internal
Controlling Working Capital
Reducing Inventory levels
Tighter Credit Control
Delaying payments of payables
Sale of Redundant Assets
Retained Earnings
CHAPTER 10
Sources of Short Term Finance:
Features
Use
Advantages
Disadvantages