Different forms of bank loans

Notes

Companies often have to rely on bank finance

Why does a company maintain liquidity?

  1. The firm needs enough money to function operationally, pay salaries, suppliers.

  2. The firm also needs to minimise the risk that some of its sources of finance will be removed from it.

  3. The firm also needs to provide against the contingency of any sudden movements in cash.

WC and Investments

  1. Working capital

    - working capital is often financed by overdraft - this is a result of lagged payments and receipts and the willingness of businesses to offer credit.

  2. Long-term finance

    - is used for major investments.

Forms of bank loans and overdrafts:

  • Overdraft

     A company, through its current account, can borrow money on a short-term basis up to a certain amount. 

    Overdrafts are repayable on demand.

  • Term loan

    The customer borrows a fixed amount and pays it back with interest over a period or at the end of it.

  • Committed facility

    The bank undertakes to make a stipulated amount available to a borrower, on demand.

  • A revolving facility

    Is a facility that is renewed after a set period. 

    Once the customer has repaid the amount, the customer can borrow again.

  • Uncommitted facility 

    The bank can lend the borrower a specified sum. 

    The only purpose of this is that all the paperwork has been done up front.

     The bank has no obligation to lend.

Notes