What is the most popular type of external finance?
Bank and institutional loans
Why are bank and institutional loans so popular?
They are quick and straightforward and provided over a fixed period of time.
When is a loan considered “short term”?
When the loan term is under one year.
What is a secured loan?
A loan secured over an asset which the lender may seize if the lendee defaults.
What is an unsecured loan?
A loan which is not secured over any asset, but which usually has a shorter term and greater interest rate to account for this.
What are the advantages of bank and institutional loans?
- 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
What are the disadvantages of bank and institutional loans?
- 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
What is a loan covenant?
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.