Obtain Finance

Types Finance

• Secured Finance– Finance is given in return for security over an asset– The security is a guarantee that lender has first

preference on the asset if the creditor becomes insolvent.

– Value of security is usually greater than the finance amount

– Security may be Fixed or Floating

Fixed Security

• Security over a fixed asset

– Security may be over a property– Security may be over a vehicle– Security over other fixed valuables such as

jewellery, plant etc

– Security in most cases must be registered

Floating Security

• Security is a given of non specific assets such as stock

• Borrower is required to keep stock levels to cover the security

• This type of finance is not usually used in the building industry

Types of Finance

• Unsecured Credit– Lender give credit with no security over any assets– If borrower becomes insolvent , lender has no

preference in front of other creditors.– There is more risk to the lender – Interest rate will be substantially higher– Credit Cards, Unsecured Personal Loans

Definition - Security• Asset owned by borrower which lender has

legal claim• Borrower cannot deal with security with out

satisfying debt• If borrower becomes unable to repay debt,

lender can seize asset to satisfy the debt.• Lender prefers 80 : 100 security• Some Lenders will allow 105 : 100• As there is higher risk, Interest will be higher

and insurance will be required

Definition - Equity

• Amount of your ownership in an Asset • If you own it outright you have 100% equity

• If your Asset is valued at $100 000 and you owe $25 000 on it

• Your equity is 75%

Short Term Finance

• Overdraft– Withdrawals exceed deposits– Prior approval authorised by lender– Interest Charged when account is in negative– Interest Credited when positive– May be secured or unsecured.

Short Term Credit

• Trade Credit– Trade credit exists when one firm provides goods

or services to a customer with an agreement to bill them later

Short Term Credit

• Bridging Loan• A bridge loan is interim financing until permanent

can be obtained.• House is bought before existing house is sold • Second mortgage required on existing house• Interest rates are usually higher to compensate for

the additional risk of the loan.

Short Term Finance

• Credit Card– It is a card entitling its holder to buy goods and

services based on the holders promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user

Medium Term Finance

• Medium term debt is money that is borrowed 2 to 6 years

Medium Term Finance• Commercial Bills– A non-bank bill of exchange (loan) generated by

merchant or investment banks and companies. The bill is evidence of the borrower's debt and commitment to repay at the due date. These bills are covered by the Bills of Exchange Act 1909 - 73, as are bank bills, but they are called 'commercial' to indicate they are issued by institutions other than banks

– Security covered by Bills of Exchange Act– Only Interest Component of the repayments are

Tax Deductible

Medium Term Finance

• Term Loans– A bank loan to a company, with a fixed maturity– Repayment only required at maturity – Interest is added principal (Amortized).– May be Secured or Unsecured– Unsecured will attract a higher Interest Rate– Only Interest Component of the repayments are

Tax Deductible

Medium Term Finance

• Personal Loans– A bank loan to an entity– Will require ongoing payments– Interest will be reducible– May be secured or unsecured– Unsecured will attract a higher interest rate– Only Interest Component of the repayments are

Tax Deductible

Medium Term Finance

• Debentures– Are instruments where by company borrows directly

from public– Acknowledgement of Debt– Private Company (Pty Ltd) can only issue to max 20

people– Public Company (Ltd) must issue a prospectus– May be secured or unsecured– Only Interest Component of the repayments are Tax

Deductible

Medium Term Finance

• Leasing– Ownership stay with financier– Regular lease payments made as per contract– At end of contact residual payment made– Lease Payments are Tax Deductable

Long Term Finance

• Long Term debt is money that is borrowed from periods greater than 6 years.

• Only Interest Component of the repayments are Tax Deductible

Long Term Finance

• Term Loan– Same as previous– Only Interest Component of the repayments are

Tax Deductible

Long Term Finance

• Mortgage Loans– Loans with Property as security– Security must be registered with Land Title Office

to be valid– Only Interest Component of the repayments are

Tax Deductible

Long Term Finance

• Sale & Lease Back– Property is sold to fanancier– Lease payments made– ATO will disallow claim if not at market value– Used to manipulate company position– Used to Free up Capital– Used to gain Tax Advantage– Lease payments are tax deductible

Long Term - Leasing

• Leveraged Leasing– Basically same as leasing previously– Lease payments are Tax Deductible– Must be at market values– Under Accounting Rules must appear as

Asset/Liability in company accounts– Will not free up capital – Will cause Profit & Assessable Income to differ