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 matters 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 bondâs price in the marketplace. This could be an attractive 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 after the issue date. The issuer notifies bondholders that after a certain date no further interest will be paid, leaving the holders with no reason to keep the bond. The company 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.
Asset-backed financiers
The banks are more covert when it comes 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 companies
Physical assets such as cars, vans, computers, 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 getting 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 becoming 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, often for fairly nominal sums, in the latter years.
Hire purchase differs from leasing in that you have the option to eventually become the owner of the asset, after a series of payments. You can find a leasing company via The Finance and Leasing Association ( www.fla.org . uk/asset/members ), which gives details of all UK-based businesses offering this type of finance. The website also has general information on terms of trade and code of conduct.
Discounting and factoring
Customers often 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 often possible to âfactorâ your creditworthy customersâ 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 an
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 bondâs price in the marketplace. This could be an attractive 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 after the issue date. The issuer notifies bondholders that after a certain date no further interest will be paid, leaving the holders with no reason to keep the bond. The company 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.
Asset-backed financiers
The banks are more covert when it comes 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 companies
Physical assets such as cars, vans, computers, 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 getting 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 becoming 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, often for fairly nominal sums, in the latter years.
Hire purchase differs from leasing in that you have the option to eventually become the owner of the asset, after a series of payments. You can find a leasing company via The Finance and Leasing Association ( www.fla.org . uk/asset/members ), which gives details of all UK-based businesses offering this type of finance. The website also has general information on terms of trade and code of conduct.
Discounting and factoring
Customers often 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 often possible to âfactorâ your creditworthy customersâ 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 an
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