Finance and Bookkeeping - Session 17

Borrowing and Growth Funding

Compare funding choices and their effect on cash, profit and repayment obligations. Prepare the evidence the CEO needs before committing to a lender.

The MSP finance task

A new client needs equipment before its first payment arrives. Using cash, borrowing and negotiating a deposit create different obligations. The funding decision starts with payment dates and the cash available for existing commitments.

Funding requirement

Identify the purchase, payment date and expected collection. The cash forecast shows the gap funding must cover.

Funding choices

Existing cash reduces operating cash. Debt creates repayment obligations. Equity funding changes ownership rights under an agreement.

Principal and interest

Principal is borrowed money owed. Interest is the borrowing charge. Principal repayment reduces debt; interest affects profit under the accounting policy.

Repayment timing

Compare net funds, fees, payment dates and any final balloon payment for the same funding purpose.

Lender conditions

Collateral secures debt. A guarantee creates an additional repayment promise. Covenants specify conditions and reporting requirements.

The practice cash gap

Practice example: pay $18,000 in week 1 and collect $22,000 in week 5. Initial funding need: $18,000.

The borrowing calculation

Practice assumptions: $18,000 at simple 12% interest for four weeks using 52 weeks per year. Interest: $166.15.

Company evidence

Reported cash alone does not establish borrowing capacity. Gather repayment schedules, dated commitments and written offers for CEO review.

An $18,000 loan reaches the business bank account. What changes?

1. Cash and revenue increase
2. Cash and the loan liability increase
3. Equipment expense decreases
4. Retained earnings increase directly

A payment contains $900 principal and $100 interest. Which amount affects profit under the stated policy?

1. The entire $1,000 payment
2. The $900 principal only
3. The $100 interest
4. Nothing until loan maturity

Offers have the same advertised rate. What comparison is useful?

1. Net funds, fees and repayment dates
2. The larger limit as the default choice
3. Only the first monthly payment amount
4. Only the lender's branch location

Key terms

Three points to remember

1. Define the funding requirement before comparing offers.
2. Forecast principal, interest and fees on their due dates.
3. Review guarantees, security and lender conditions before approval.