10.3 Bank and institutional loans Flashcards Preview

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Flashcards in 10.3 Bank and institutional loans Deck (8)
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1
Q

What is the most popular type of external finance?

A

Bank and institutional loans

2
Q

Why are bank and institutional loans so popular?

A

They are quick and straightforward and provided over a fixed period of time.

3
Q

When is a loan considered “short term”?

A

When the loan term is under one year.

4
Q

What is a secured loan?

A

A loan secured over an asset which the lender may seize if the lendee defaults.

5
Q

What is an unsecured loan?

A

A loan which is not secured over any asset, but which usually has a shorter term and greater interest rate to account for this.

6
Q

What are the advantages of bank and institutional loans?

A
  • can be quickly arranged
  • good for budgeting as set payments are spread over a specific time period
  • loans are more flexible in term than other options
  • banks do not out much emphasis on credit history for short term loans
  • do not require a share of the business to be relinquished
  • interest is normally tax deductible
  • not repayable on demand unless defaulted
7
Q

What are the disadvantages of bank and institutional loans?

A
  • short term loans usually have high interest
  • loans can compound debt issues
  • the bank can demand repayment of the loan if the business defaults
  • normally an extra charge for early repayment
8
Q

What is a loan covenant?

A

A restrictive clause in a loan agreement that places certain constraints on the borrower, such as forbidding the borrower from undertaking certain activities or taking out further debt.

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