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The Rough Guide to Finance in the UK
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The Rough Guide to Finance in the UK

UK Finance Information :
Finance can be tricky at times, but managing it thoughtfully can bring you profits.

When we talk about finance in business terms, we generally talk about debt and equity, although there are a number of hybrids of each. When we relate to Debt finance, it is usually secured against an asset or group of assets (the assets used as security could be plant and machinery, stock or debtors or a combination of all three), whilst equity, which is a risk capital, wherein the investors bears the risk of losing its money if the company is unsuccessful.

Debt finance basically includes bank overdrafts, invoice discounting and loans. In case the company winds up, the lending institution will take charge over the assets – this could be fixed or floating charge. However, the difference for the charge is debtors right to receive repayment of the monies due. But to an equity investor, the right to appoint a receiver is not available. In Debt finance interest is charged on the outstanding loan whether the business is profitable or not. There may come a time in the development of a business when a company cannot borrow any more debt, maybe due to a lack of security, it is then that the company may consider raising equity.

On the other hand, Equity finance includes ordinary shares and preference shares. In Equity finance investors subscribing for equity do not have the security available to the debt funders and consequently bear the majority of the risk, should the business not be as successful as projected. Similarly, should the business exceed expectations, it will be the equity investors (primarily the ordinary shareholders) who will benefit the most.

However, the cost of finance will depend upon the risk the funder is taking by lending or investing in the company - the higher the risk, the more the finance will cost. Also, there are additional costs of the finance like fees towards financial advisers, lawyers, accountants particularly where equity investment is required.

 

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