Tag Archives | financing

Subordinated Debt

See Also:
Mezzanine Debt Financing (Mezzanine Loans)
Collateralized Debt Obligations
Outstanding Debt
Self-Liquidating Loans
Loan Term
What Your Banker Wants You to Know
Alternative Forms of Financing

Subordinated Debt Definition

Subordinated debt is a security which has a residual claim upon a company’s assets, after the senior debt holders have had their claims satisfied.

Meaning of Subordinated

Subordinated debt is usually taken on by a company who cannot reach better financing opportunities. Whereas, subordinated debentures often contain a higher interest rate due to the risky nature of the securities to investors. Investors would simply refuse to take on a security that has a residual claim on the assets unless the company were willing to pay more. This is also why many companies use this as a last option in financing because of the high costs involved.

Subordinated Example

For example, Parent Co. made an acquisition of Subsidiary Co. a year ago in a leveraged buyout (LBO) for $100 million. They were able to gain a loan from the bank with low interest rates at 5% for $75 million, and was offered a Line of Credit for $50 million. Parent Co. has recently had some trouble cutting costs and getting Subsidiary to run smoothly. Thus, they have used up the rest of its line of credit.

Parent Co. is looking to go public with an IPO soon. But they need financing now to stretch the company until it is able to provide a public offering. Therefore, Parent Co. receives subordinated debt at a rate of 8% for another $50 million. This is at a higher cost to the company/. But they can use it to postpone the debt woes until the company is able to make a public offering in the market. They can then use equity money to pay off the subordinated securities as well as the line of credit.

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Separation Of Duties

Separation of Duties Definition

Some circles refer to separation of duties as segregation of duties. It refers to a concept that leads to greater internal control within a company. The accounting separation of duties definition is a theory that the job of an employee should provide a reasonable evaluation for the job of another employee. In layman’s terms, no one person has too many responsibilities rested on him/her. What this does is prevent mistakes and fraud which could bring detrimental consequences upon the company as a whole as well as the individual.

Separation of Duties Example

A separation of duties example could be the relationship that exists between an accountant and a cashier. This policy maintains that the accountant should not update the cash balance on the cash as well as keep track of the cash on his person. Contrarily, the cashier should not have both those responsibilities either. It upholds that the accountant should keep track of the cash books while the cashier accepts responsibility for the cash that’s on hand. At the same time, separation of duties works for constructs other than business types. Our government has Legislative, Judicial, and Executive branches. The “duty” of running an efficient and successful government is spread over three entities.

Accounting Separation of Duties

While it is intelligent for there to be some sort of accounting separation of duties when it comes to jobs in general, it is paramount to efficiency and success. In fact, keep accounting completely separate from the rest of the operations divisions in the company. This remains constant for all aspects of production and financing. Therefore, there should be no individuals in the work-in-progress section that are keeping track of products in the finished goods section.

Why Is Separation Of Duties Important?

Obviously, as said before, duties maintains an efficient balance of work that ensure the accuracy and correctness of jobs. The work of one man, in turn, checks the work of another. Overall, this keeps a company or organization running as smoothly as possible. In addition, it produces accurate product and financial information. Separation of duties also creates jobs for more individuals. If one person was expected to be responsible for multiple jobs, then there would most certainly be fewer jobs for others. This spreading of responsibility allows for a more manageable workload. In addition, it allows for more available responsibilities for others to take.

separation of duties, Accounting Separation of Duties

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Self-Liquidating Loans

See Also:
Loan Agreement
Collateralized Debt Obligations
When is an interest rate not as important in selecting a loan?
Debt Ratio Analysis
Debt Service Coverage Ratio (DSCR)
What Your Banker Wants You To Know
7 C’s of Banking
Budgeting 101: Creating Successful Budgets

Self-Liquidating Loans

The term “self-liquidating loans” is banker slang. It refers to a loan that is used to generate proceeds that are in turn used to repay the loan. Basically, a borrower takes out a loan used to finance business activities that generate revenue. Then the borrower takes the revenue generated from those business activities and uses it to repay the money that was borrowed to finance the activities.

Self-Liquidating Loan Example

The term can apply to a company that experiences seasonal fluctuations in business. During the busy season when business is booming the company needs to borrow money to finance short-term assets such as inventory and accounts receivable. The company borrows money to buy more materials to take advantage of the increasing demand of the busy season.

Then when business slows down the company will have less of a need for borrowed funds to finance short-term assets like inventory accounts – the need for financing will decline as the need for inventory declines. At this point, the company will have generated profits from the busy season, and will now be able to use those profits to repay the loans it took out to finance operations during the busy season. And this is called a self-liquidating loan.


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Source:

Higgins, Robert C. “Analysis for Financial Management”, McGraw-Hill Irwin, New York, NY, 2007.

 

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Special Tax Bond

Special Tax Bond Definition

A Special Tax Bond is a bond, usually issued by a government entity. It uses a particular tax to pay off creditors.

Special Tax Bond Meaning

Local governments like cities or states normally use special tax bonds. A government entity will use a special tax bond for city or state management. Tax bond payments are usually imposed on the general population through a property tax or special income tax. This depends on the city or state. Once these payments are collected, they are sent off to creditors who provided funding for the particular job.

Special Tax Bond Example

For example, Middleland decided that it would like to build a large park in the middle of the city. Middleland thus decided to issue special tax bonds to gain financing for the project. They used the financing to accomplish the following:

  • Tear down older junky houses
  • Plant grass in the cleared out area
  • Build a running track as well as a new playground

As the land is being developed, Middleland imposes a special tax on the population in the form of extra property taxes. Once the city makes these collections, they are then sent to creditors to make coupon payments as well as principal when the project is all finished.

special tax bond

See Also:
Ad Valorem Tax
Direct Tax
Marginal Tax Rate
What is a Bond?
Coupon Rate Bond

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Sole Proprietorship

Sole Proprietorship Definition

The sole proprietorship definition is a private business owned and operated by one individual. Furthermore, a proprietorship is unincorporated and is not a legal entity separate from its owner. As a result, the owner earns all of the profits and incurs all of the losses from business operations. Therefore, the sole proprietor is legally liable for all of the activities and obligations of the business. For example, if the proprietorship defaults on debt obligations, the owner risks liquidation of personal assets.

Advantages and Disadvantages of a Sole Proprietorship

There are several advantages to the sole proprietorship. Proprietorships are easy to establish, easy to dissolve, and they give the owner a significant amount of operational freedom and flexibility. For tax purposes, the owner simply includes the profits or losses of the proprietorship with his or her individual tax filings.

There are also disadvantages. The owner has unlimited liability for the activities and obligations of the proprietorship. This puts the owner’s personal assets at risk. Also, because of the small scale of a proprietorship, it can be difficult to gain access to substantial capital resources and financing. As a result, this limits the growth potential of the enterprise.


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See Also:
Partnership
General Partnership
Limited Partnership
S Corporation
How to Run an Effective Meeting

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Time To Find A New Lender?

See Also:
External Sources of Cash
Other People’s Money
Due Diligence on Lenders
Don’t Tell Your Lender Everything
Finding The Right Lender

Is It Time To Find A New Lender?

I was meeting with a business adviser last week named John and he asked me “When do you think it is in the best interest for a company to find a new lender?”

Determine Location On Lender’s Food Chain

I told John the first thing a company must determine is where they are located on the food chain of the lender. It may be hard to believe, but some lenders may not want their business. If the company does not realize the lender’s feelings and chooses to stay, the lender will take their business (money) until they realize they are being over charged and leave.

John then said “What you are saying is the lenders may not value some business.” I said that is right, and as you know, companies normally deal with a lender that makes the process faster and or easier. I then asked John “How many of your clients have done any due diligences to determine if the lender is going to help them meet their personal or business goals?” He looked a little funny and said “None that I know of.”

I said that is normally the case. When your client is talking to the lender, they need to determine if the lender is really listening. In some, if not in most situations, the lender is listening, but not about your needs. The lender may be listening for selling signals to seize upon the opportunity to offer you some product or service you really don’t need or want.

Fee Income

Lenders have diversified their services and are very interested in fee income. Fee income is defined as the income a lender receives without taking any risk. Checking account maintenance fees, loan closing fees, ATM fees, etc., meet this definition. Your client’s business may need some, if not all of the services offered, but is the lender asking questions about the company’s needs, or just selling their services?

Your clients should realize that lenders do not have their best interest in mind. Lenders are in business to make money, just like your clients. I have had lenders tell me they do not want to offer solutions that would reduce costs to their customers because they would loose their fee income and reduce their profits.

Your clients must remember to make sure the lender is listening and understanding their needs. Additionally, your clients should understand, the best lender may not be the fastest and easiest to deal with.

find a new lender

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S Corporation vs C Corporation

See Also:
S Corporation
C Corporation
Limited Liability Company (LLC)

S Corporation vs C Corporation

Although these two entities are very similar, there has always been a debate between an S corporation vs C corporation. The S corporation vs C corporation debate has been ongoing for a while. The following are some major differences that exist which may help an entity choose the proper class of corporation.

Double Taxation

In a C corporation, the entity is forced to pay Federal Income Taxes at the entity level and again at the individual level when it distributes dividends to its shareholders. This double taxation is a huge disadvantage to the C corporation. It acts as a flow through entity much like a partnership. Each individual is only taxed on their earnings from the s corp at the individual level on schedule E of the IRS form 1040.

# of Shareholders

An S corporation can only have 100 shareholders total. This is good if it is a smaller company. However, for larger companies, this is simply not possible because of the amount of cash flow needed to finance a larger corporation. Consider all family members within the S corporation as only one shareholder. This means that there is a way in which there could be more than 100 shareholders. It also means that S corporation holders can increase their interest in the business without losing the status of an S corp.

Forms of Stock

C corps can issue several different forms of stock to obtain financing for its operations. In comparison, an S corporation can only have one class of stock. The C corporation’s advantage is that it has the ability to issue preferred shares or other classes depending on its needs.

Type of Company

You can form S corps only after you set a company as a C corp or a Limited Liability Company (LLC). This is a disadvantage for entities that would like the S corporation status (i.e. partnerships because of the similarities between the two).

Note: This is by no means all of the S corporation and C corporation differences. However, our list includes some of the main ones that influence a company to go one way or another.


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