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Invoice Discounting

Finance can be raised against debts due from customers via invoice discounting, thus improving cash flow. Debtors are used as the prime security for the lender and the borrower may obtain up to about 80 percent of approved debts.

Hire Purchase and Leasing

Hire purchase agreements and leasing provide finance for the acquisition of specific assets such as cars, equipment and machinery involving a deposit and repayments over, typically, three to ten years.

Loans

Medium term loans (up to seven years) and long term loans (including commercial mortgages) are provided for specific purposes such as acquiring an asset, business or shares. The loan is normally secured on the asset or assets and the interest rate may be variable or fixed.

Bank Overdraft

An overdraft is an agreed sum by which a customer can overdraw their current account. It is normally secured 1 on current assets, repayable on demand and used for short term working capital fluctuations. The interest cost is normally variable and linked to the bank base rate.

Completing the finance-raising

Raising finance is often a complex process. Business management needs to assess several alternatives and then negotiate terms which are acceptable to the finance provider. The main, negotiating points are often as follows:

1. Whether equity investors take a seat on the board

2. Votes ascribed to equity investors

3. Level of warranties and indemnities provided by the directors

4. Financier's fees and costs

5. Who bears costs of due diligence.

3. Answer the questions.

1. When do businesses need to raise finance?

2. What are potential sources of finance?

3. What is the key consideration in choosing the source of finance?

4. What are the main differences between borrowed money and equity?

5. How is it possible to keep the financial risk of a business at an optimal level while raising finance?

6. What are the main types of finance?

7. What is venture capital intended for?

8. What are grants aimed at?

9. What is invoice discounting?

10. What are loans provided for?

11. What is an overdraft?

12. What are the main negotiating points while completing the finance-raising?

a) Buying expensive goods by.making regular payments over a period of time

b) Lending a business a sum of money equei to that owed to the business by its suppliers or customers

c) Money lent to start a new business

d) Allowing customers to take out more money from their bank than they had in it

e) Money borrowed on which interest is paid

f) Giving someone the right to use something for a period of time in return for payment

g) Money given to an organisation for a particular purpose, often by a government.

1 grant

2 venture capital

3 invoice discounting

4 hire purchase

5 leasing

6 loan

7 overdraft

4. Match the words and phrases to their meanings.