1. LEARNING OBJECTIVES
Describe, compare and contrast the bank overdraft and the bank term loan
Show awareness of the central importance of trade credit and good debtor management and be able to analyse the early settlement discount offer
Explain the different services offered by a factoring firm
Consider the relative merits of hire purchase and leasing

2. and medium-term finance
Exhibit The main forms of short-term
and medium-term finance
Short-term
Medium-term
Overdraft
Term loan
Trade credit
Hire purchase
Factoring
Leasing
Bills of exchange
Acceptance credits

3. BANK SOURCES – OVERDRAFTS
An overdraft is a permit to overdraw on an account up to a stated limit.
Advantages of overdrafts
1 Flexibility
2 Cheapness
Two to five percentage points over base rate
Interest on only the daily outstanding balance
Overdraft interest can also be deducted from income to
determine the profits to be subject to tax
Drawbacks of an overdraft
Bank retains the right to withdraw
Security – banks usually take a fixed charge or a floating
charge

4. CONDITIONS OF LENDING 1 Cash flow projections 2 Creditworthiness
3 The amount that the borrower is prepared to
put into the project
4 Security

6. TERM LOANS
A term loan is a loan of a fixed amount for an agreed time and on specified terms.
Normally between three and seven years
Can range from one to 20 years
Grace period
‘Balloon’ payment
‘Bullet’ repayment
Instalment arrangement
Fixed or floating rates
Commitments/covenants
Usually the bank expects either a fixed or floating charge over the firm’s assets and/or guarantees from third parties.

7. TRADE CREDIT
When goods or services are delivered to a firm for use in its production they are not paid for immediately.

8. TRADE CREDIT

9. Advantages of trade credit
1 Convenient/informal/cheap
2 Available to companies of any size
Factors determining the terms of
trade credit
Tradition within the industry
Bargaining strength of the two parties
Product type

10. TRADE-DEBTOR MANAGEMENT
Trade debtors are the sales made on credit as yet unpaid.
Exhibit The debtor trade-off
Costs of financing
Liquidity risk
Risk of default
Costs of administration
Gains in
sales
Versus

11. TRADE CREDIT MANAGEMENT
The following points are relevant in trade
credit management:
Credit policy
Assessing credit risk
Agreeing terms
Collecting payment
1 Be strict with the credit limit
2 Send invoices promptly
3 Systematically review debtors
4 Slow payers have to be chased
Integration with other disciplines

12. FACTORING 2 Sales ledger administration 3 Credit insurance
1 The provision of finance
2 Sales ledger administration
3 Credit insurance
Exhibit Stages in a factoring deal
Recourse and non-recourse
Invoice discounting
Supplying
firm (seller)
1 Goods
Customer
3 80% of customer
debt available to
seller immediately
2 Right to receive
payment on
invoice sold to
factor
4 Customer pays
debt to factor a week
after delivery of goods
5 20% payable, less
factor’s fees and
interest, after customer
pays factor
Factor

13. hirer makes all payments
HIRE PURCHASE
Exhibit The hire purchase sequence
Plant or equipment
1 Bought by HP company
and remains property
of HP company until
hirer makes all payments
2 Available for
immediate use
Hirer
(e.g. firm)
Hire purchase
company
(e.g. finance house)
3 Regular
payments
4 When all payments
are made hirer
becomes the owner

14. MAIN ADVANTAGES OF HIRE PURCHASE
1 Small initial outlay
2 Easy to arrange
3 Certainty
4 HP is often available when other sources of finance are not
5 Fixed-rate finance
6 Tax-relief

15. LEASING Operating lease – short-term lease
Finance lease – for full cost (or almost full cost) of equipment plus interest
Exhibit A leasing transaction
Asset
e.g. plant, machinery
vehicle
Buys asset and retains
legal ownership
throughout
Rental payments
Lessee has use
of the asset for a
period of time
Lessee
(company using
equipment)
Finance house
(lessor)

16. ADVANTAGES OF LEASING Small initial outlay Certainty
Available when other finance sources are not
Fixed-rate finance
Tax relief
The transfer of obsolescence risk to the
finance provider

17. BILLS OF EXCHANGE
A bill is a document which sets out a commitment to pay a sum of money at a specified point in time.
Seller
1 Goods
despatched
2 Bill of exchange
drawn up and sent
to customer
4 Bill is sold to
discount house
at less than
face value
5 Cash
received by
seller
3 Customer
acknowledges
indebtedness by
accepting bill
(signs the bill)
6 Payment on
the bill
Discount
house
Customer
Exhibit The bill of exchange sequence

18. ACCEPTANCE CREDITS (BANK BILLS or BANKER’S ACCEPTANCE)
Firm
1 Acceptance
credit drawn up
and sent to bank.
Acceptance
commission paid
to bank
2 Bank accepts
the promise to pay
a sum at a stated
future date
4 Cash
3 The acceptance
credit is sold at
a discount
6 Firm pays bank
acceptance
credit sum
5 Bank pays final
holder of acceptance
credit the due sum
Bank
Discounter
Exhibit An acceptance credit sequence