Explain short- and long-term financing mix, Financial Management

Assignment Help:

Q. Explain Short- and long-term financing mix?

In forming a fresh business there is no business history to present to the bank thus there is additional uncertainty which will need to be considered before any finance is probable to be forthcoming either of a short-term or a long-term nature.

If though there is a good relationship with the bank an overdraft might be possible for the entire financing requirement but this runs the risk of being payable immediately on demand and thus if planned cash flows didn't turn out as expected then the bank may get nervous and possibly withdraw credit facilities.

A medium-term loan would as well be possible to meet the entire financing requirement. This has the benefit of security in that it cannot be recalled unless there is a breach in the terms. Most probable it would come from a bank, the issue of debentures being entirely out of the question on the grounds of scale. Erstwhile considerations would be the term of the security required, loan, fixed or variable interest rates, other conditions (example covenants, accounts and reviews).

Other forms of finance comprise leasing which can be regarded as a quasi loan if entering into a long-term contract although other considerations may apply such as variability of rental terms residual value of asset, transfer of risk, cancellation rights, amount of rentals, period of agreement.

A further choice would be for Mr Geep to put in more ownership capital perhaps secured on the equity in his house. A mixture of these a variety of forms of finance would be most likely.

The accurate mix will depend upon a number of factors (although some of these may as well influence the total amount of finance needed)

- The ability as well as willingness of Mr Geep to supply funds initially and additionally if plans do not turn out as expected.

- A loan would require a few security. The company has only some assets to use as security as there does not appear to be any property and the machinery has a low net realisable value and there is little inventory which is normally poor security anyway. An overdraft may as well require security but may place increased emphasis on the cash generating potential of the business to make appropriate repayments. Eventually though this is an unlimited business and Mr Geep's personal assets and particularly the equity in his house will act as security.

- Other costs are essential including the drawings of the owner Mr Geep and interest charges. These will decrease the ability of the business to repay any loan and thus extend the period of repayments in excess of the above estimate of 35 months.

- There may be more restricted covenants in a loan agreement than an overdraft as an overdraft is repayable on demand and thus the bank needs less protection from other clauses in the contact. There are though likely to be restrictive covenants in overdraft agreements.

- Overdraft interest is merely payable on the balance outstanding thus if major inflows occur this will reduce interest costs.

- The difference among short- and long-term interest rates may influence the relative charges on an overdraft or a medium-term loan.

- The purpose of the finance is as well likely to affect the form of finance. For instance if funds are required to finance fixed assets then it might be appropriate to use longterm finance to match the long-term usage of the asset.


Related Discussions:- Explain short- and long-term financing mix

Financial and strategic analysis, Evaluate the firm’s financial standing fo...

Evaluate the firm’s financial standing for the past 5 years: • Undertake a financial and strategic analysis of its performance: o Use the Assignment Questions for guidance ON

Irr and npv, (a) Lonesome Gulch Mines has a standard deviation of 42% per ...

(a) Lonesome Gulch Mines has a standard deviation of 42% per year and a beta of 0.10.  Amalgamated Copper has a standard deviation of 31% a year and a beta of 0.66.

State about the country analysis and political risk, Country analysis and p...

Country analysis and political risk Country analysis could use tools for example PEST factors in order to strategically analyse countries. Political risk

Ratio analysis, define ratio analysis. explain the advantages of ratio anal...

define ratio analysis. explain the advantages of ratio analysis

Procurement, What is the explanation for leaset cost selection

What is the explanation for leaset cost selection

Mass and batch production, a) IPod -Line / Mass production is most suitable...

a) IPod -Line / Mass production is most suitable given that Apple can sell the standardised product to mass markets across the world. Only small variations to the production proces

Explain how eurocurrency is created, Explain how Eurocurrency is created. ...

Explain how Eurocurrency is created. Answer: The center of the international money market is the Eurocurrency market. A Eurocurrency is a time deposit of money in an internationa

Alternative summarised version of tests of controls, Alternative summarised...

Alternative summarised version of tests of controls · Segregation of duty (staff records are separate from wages department) · Documentation ( written evidence ) ·

Senior versus subordinate bonds, This is again a distinction which be...

This is again a distinction which becomes important in case of a default. The senior bondholders have to be paid before the subordinate bondholders. This means th

Differentiate between a bull and a bear spread, Question 1: a) Describe...

Question 1: a) Describe fully why and how government intervenes in the foreign exchange market. b) "Changes in the equilibrium exchange rate between a pair of currencies rel

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd