Finance Sources and Characteristics Quiz

An overdraft occurs when a business's current account payments exceed its income for a brief period. The bank agrees to cover the deficit for a temporary period, allowing the business to operate even with a negative balance.

Overdrafts are the most popular way for businesses to secure short-term finance. They're quick to arrange, flexible in the amount borrowed, and you only pay interest when the account is overdrawn.

Overdrafts typically have a limit based on the business's known income. This limit helps ensure the bank is not at undue risk.

Overdrafts usually involve interest calculated on the daily deficit balance. It's charged at a base rate plus a margin, often calculated quarterly.

Overdrafts are designed for short-term needs, such as covering temporary cash flow gaps or unexpected expenses.

Technically, overdrafts are repayable on demand, meaning the bank can request repayment at any time. However, this is rarely enforced.

The amount of security required for an overdraft depends on the size of the facility. Smaller overdrafts may not require any security, while larger ones may require some form of collateral.

Both the business and the bank benefit from overdrafts. The business gets a flexible way to borrow short-term funds, while the bank accepts the inherent fluctuations in the account balance.

A loan provided for a specified period with a fixed amount, typically obtained from a bank. Often used for specific purposes like asset purchase. Repayment includes predetermined interest and capital installments.

A common source of short-term finance for businesses. It allows the purchase of assets such as raw materials on credit, offering payment terms ranging from 30 to 90 days. Essentially, it's an interest-free short-term loan.

A contract between two parties: the lessor (owner) and lessee (user). The lessee pays regular rentals for the possession and use of a specific asset that the lessor owns.

A type of lease where the asset is rented for a shorter period. It's a way to finance non-current assets on a temporary basis.

A type of lease for a longer period. It's a long-term funding source for assets.

A financial strategy where a company sells its property to an entity like an insurance company or pension fund for immediate cash. Then, they lease the same property back for a long period, usually with rent reviews.

A contract between a lessor and lessee for the temporary use of a specific asset. The lessee selects the asset from a vendor or manufacturer.

A type of loan note issued by a company, acknowledging a debt with specific provisions for interest payments and eventual capital repayment.

A type of long-term debt capital raised by a company, with interest payments usually made half-yearly at a fixed rate. Holders of bonds are considered long-term payables for the company.

Bonds that allow the holder to convert them into ordinary shares at a predetermined price and time, giving them the potential for equity ownership.

This is a type of risk capital provided in exchange for an equity stake in a private company. It can come from wealthy individuals or venture capital firms managing specific funds.

Venture capital firms often invest in businesses that are just starting up, providing the necessary funds for development and growth.

Factors like company size, loan duration, interest rate preference (fixed or floating), security offered, and debt covenants influence the decision to use debt finance.

A leasing agreement where the lessor (owner) retains ownership of the asset while the lessee (user) pays rent for possession and use of the asset over a specified period.

It outlines the legal framework for leasing agreements, defining the roles of lessor and lessee, and specifying the terms and conditions.

Funding provided by a group of investors to help a new business get started. This group might have already invested in the business during its early stages.

Capital provided to companies looking to expand into new markets, develop new products, or acquire other businesses. This is a significant investment.

When a company's managers buy the business from its existing owners. The managers take control of the company.

Investing in a company by purchasing some of its existing shares. This helps existing owners raise capital.

Raising money by selling shares to new investors through an initial public offering (IPO), a placing, or a stock exchange introduction.

Shares that represent ownership in a company.

The right to attend general meetings of the company, vote on important matters, receive dividends, and receive company accounts. They also receive a share of the company's assets in a liquidation.

Offering shares to the public for the first time.

A method of raising capital by issuing shares to the public, typically through a merchant bank.

A method of raising capital by issuing shares directly to a small number of investors, typically institutional investors, rather than the general public.

A business can raise capital by listing its shares on a stock exchange, making them available to investors for buying and selling.

Placings are generally a cheaper, faster and less information intensive way to raise capital compared to an IPO. The institutional investors also gain control of the company.

Listing a company's stock on the stock exchange offers access to a larger investor pool, making it easier to grow through acquisitions, and facilitates shareholder fund retrieval for other projects.

Listing your company on the stock market comes with greater regulations, stricter accountability, and increased public scrutiny.

The initial charge for listing new securities on the stock market.

A type of fundraising where existing shareholders are given the right to buy more shares at a discounted price.

A rights issue is generally cheaper to undertake than an IPO.

A company can use funds raised through a rights issue to pay off debt, potentially reducing the financial risk for the company.

Fees charged by investment banks for underwriting a securities offering.