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is payable and the loan itself is secured against the property； so should the
business fail the mortgage can substantially be redeemed。
panies wanting to raise funds for general business purposes； rather
than as with a mortgage where a particular property is being bought； issue
58 The Thirty…Day MBA
debentures or bonds。 These run for a number of years； typically three years
and upwards； with the bond or debenture holder receiving interest over
the life of the loan with the capital returned at the end of the period。
The key difference between debentures and bonds lies in their security
and ranking。 Debentures are unsecured and so in the event of the pany
being unable to pay interest or repay loans they may well get li。。le or
nothing back。 Bonds are secured against specific assets and so rank ahead
of debentures for any payout。
Unlike bank loans； which are usually held by the issuing bank； though
even that assumption is being challenged by the escalation of securitization
of debt being packaged up and sold on； bonds and debentures are sold to
the public in much the same way as shares。 The interest demanded will be
a factor of the prevailing market conditions and the financial strength of the
borrower。
Categories of bond
There are several general categories of bond that panies can tap into：
。 Standard bonds pay interest； a coupon； half…yearly on the principal
amount； known as the face or par value。 At the maturity date the principal
is repaid。 The value of bonds fluctuates dependent on market
conditions； the length of time to maturity and the likelihood of the
borrower defaulting。 None of these ma。。ers are of immediate concern
to the recipient of the funds； as long as they can service the interest。 The
risk is for the bondholder who can see the value of their investment
alter over time。
。 Zero coupon bonds pay no interest over their life but pay a lump sum
at maturity equivalent to the value of the interest such an investment
would normally bear。 The buyer of the bond receives a return by the
gradual appreciation of the bond’s price in the marketplace。 This could
be an a。。ractive financing strategy for a business making an investment
which itself will not bear fruit for a number of years。
。 Junk bonds are bonds usually subordinated to； that is； put below others
in the pecking order of who gets paid in tough times； other regular
bonds。 Such bonds carry a higher interest burden。
。 Callable bonds are used when an issuer wants to retain the option
to buy back their bonds from the public if general interest rates fall
sharply a。。er the issue date。 The issuer notifies bondholders that a。。er
a certain date no further interest will be paid； leaving the holders with
no reason to keep the bond。 The pany issuing the bond can then go
out to the market and launch a new bond at a lower rate of interest and
so lower its cost of capital。 This process is also known as refinancing。
Finance 59
ASSET…BACKED FINANCIERS
The banks are more covert when it es to looking for security for money
lent。 Two other major sources of funds are less circumspect； indeed their
whole prospectus is predicated on a precise relationship between what
a business has or will shortly have by way of assets； and what they are
prepared to advance。 Both groups play an important role in financing
growing businesses。
Leasing panies
Physical assets such as cars； vans； puters； office equipment and the
like can usually be financed by leasing them； rather as a house or flat may
be rented。 Alternatively； they can be bought on hire purchase。 This leaves
other funds free to cover the less tangible elements in your cash flow。
Leasing is a way of ge。。ing the use of vehicles； plant and equipment
without paying the full cost all at once。 Operating leases are taken out
where you will use the equipment （for example a car； photocopier； vending
machine or kitchen equipment） for less than its full economic life。 The
lessor takes the risk of the equipment being obsolete； and assumes
responsibility for repairs； maintenance and insurance。 As you； the lessee；
are paying for this service； it is more expensive than a finance lease； where
you lease the equipment for most of its economic life and maintain and
insure it yourself。 Leases can normally be extended； o。。en for fairly nominal
sums； in the la。。er years。
Hire purchase differs from leasing in that you have the option to eventually
bee the owner of the asset； a。。er a series of payments。 You can find
a leasing pany via The Finance and Leasing Association （fla 》
For Businesses 》 Business Finance Directory）； which gives details of all UKbased
businesses offering this type of finance。 The website also has general
information on terms of trade and code of conduct。
Discounting and factoring
Customers o。。en take time to pay up。 In the meantime you have to pay those
who work for you and your less patient suppliers。 So； the more you grow；
the more funds you need。 It is o。。en possible to ‘factor’ your creditworthy
customers’ bills to a financial institution； receiving some of the funds as
your goods leave the door； hence speeding up cash flow。
Factoring is generally only available to a business that invoices other
business customers； either in its home market or internationally； for its
services。 Factoring can be made available to new businesses； although its
services are usually of most value during the early stages of growth。 It is
60 The Thirty…Day MBA
an arrangement that allows you to receive up to 80 per cent of the cash
due from your customers more quickly than they would normally pay。 The
factoring pany in effect buys your trade debts； and can also provide a
debtor accounting and administration service。 You will； of course； have to
pay for factoring services。 Having the cash before your customers pay will
cost you a li。。le more than normal overdra。。 rates。 The factoring service will
cost between 0。5 and 3。5 per cent of the turnover； depending on volume of
work； the number of debtors； average invoice amount and other related
factors。 You can get up to 80 per cent of the value of your invoice in advance；
with the remainder paid when your customer se。。les up； less the various
charges just mentioned。
If you sell direct to the public； sell plex and expensive capital equipment；
or expect progress payments on long…term projects； then factoring
is not for you。 If you are expanding more rapidly than other sources of
finance will allow； this may be a useful service that is worth exploring。
Invoice discounting is a variation on the same theme where you are
responsible for collecting the money from debtors； this is not a service
available to new or very small businesses。 You can find an invoice discounter
or factor through The Asset Based Finance Association （
thefda。uk/public/membersList。asp）； the association representing the
UK’s 41 factoring and invoice discounting businesses。
EQUITY
Businesses operating as a limited pany or limited partnership have a
potentially valuable opportunity to raise relatively risk…free money。 It is riskfree
to the