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Debt Finance and Loans Explained

Debt Finance and Loans Explained, Long Term Debt Avenues »

Firms should match the maturity structure of their assets (that are funded through debt) with the maturity structure of their liabilities (their debts)
Term loans – Banks
Fixed-term loan periods generally range from 3 to 15 years
Typically used ton finance capital expenditure (building equipment)
Interest may be fixed or variable, and depends upon
–      The credit rating of the borrower
–      Term of the loan repayment schedule
Term loans – Investment and Merchant banks
Loans generally do not exceed 5 years
Interest fixed, but usually divided into a series on interest rate review, or roll-over periods
Loan agreement also …

Debt Finance and Loans Explained, Short Term Debt Avenues »

Short-term debt
Loans and instruments used by companies to raise funds for periods up to one year
Short-term debt is used to finance
–      Working capital requirements
–      Cash flow shortfalls
–      Trade credit
Trade Credit
Supplier of goods and services allows the purchaser a grace period before the account’s settlement date
Often includes discount for early payment (2/10 n/30)
The opportunity cost of foregoing the discount can be calculated as
Opp cost =

% discount
X                                 365

100% – % discount
Days difference b/t early and late settlement

= 2/98 x 365/20
= 17.65%
Intercompany loans
Insurance and finance companies and major retailers with short-term …

Debt Finance and Loans Explained, Introduction to Markets »

Factors affecting supply for credit
Deregulation gave banks grater flexibility in issuing loans
This may have resulted in a greater volume of loans being extended to corporate borrowers
Factors affecting demand for credit
Several factors suggested are
–      1. Changes in portfolio management practices
–      2. Development of risk management procedures
–      3. Interaction of inflation and tax
–      4. Behavioural aspects

Changes in portfolio management practices
–      The introduction of active portfolio management may have led to increased share turnover, and therefore volatility of share prices
–      Consequently, debt may have been viewed as being comparatively more stable
Development of risk …

Debt Finance and Loans Explained, Long Term Debt Avenues »

Where possible, a business should match the maturity and repayment schedule of its debt with the cash flow patterns of its investments that are being financed through debt. For investments of a medium-to-longer-term nature, the debt should be of a similar term. There are numerous arrangements and instruments of medium-to-longer-term debt. Such debt may be intermediated finance provided by financial institutions, or it may be direct finance obtained from either the domestic or international capital markets.
The simplest form is the term loan facility, available through banks and money market corporations. …

Debt Finance and Loans Explained, Functions of Banks, Short Term Debt Avenues »

Short-term debt is available from a range of institutions including banks, merchant banks, investment banks and finance companies. The debt may take a variety of forms, ranging from a loan to a situation in which the borrower sells a financial instrument directly into the market and promises to pay the holder of the instrument its face value on the maturity date. The form that the debt will take is normally determined by the credit rating of the issuer, the size of the funding requirement, and the preferences of the investors.
In …

Debt Finance and Loans Explained, Stock Investment Strategy, Stock Perfomance Analysis and Strategy, The Sharemarket »

In determining whether to fund its expansion through the use of debt or equity, a business must consider the current debt to equity ratio, and the associated degree of financial risk. If the ratio is such that an increase in the proportion of debt can be sustained without an undue increase in financial risk, it is in the interests of the existing owners for the expansion to be funded through debt rather than equity. Once reaching an appropriate debt to equity ratio, further expansion must be accompanied by the injection …