Video Transcript: Short and Long Term Debt Financing

Hello, welcome. We're going to discuss short and long term debt financing. So  we want to talk about applying for a business loan, right? The assets or other  financial resources available to a business is called capital, right? So we need  capital. We need cash to run our business, purchases of plant assets used in  

the operation of a business are called capital expenditures. Anytime we  purchase plant, a plant, there's a factory, property or equipment, those are  known as capital expenditures, assets pledged to a creditor to guarantee  repayment of a loan is called collateral. So a lot of times, banks are going to  want you to come with some sort of asset that you own and put that up as a  guarantee against your loan from the bank, right? And the amount of collateral  that you have is going to, coupled with your credit profile, will really determine  your interest rate. The use of funds, what portion of the funds will be used for  revenue expenditures and capital expenditures, okay, what is revenue  expenditures? Right? Revenue expenditures is reinvestment into the  organization, into our operation for the growth function and capital expenditures, again, are investments into plant, property and equipment, business experience. What experience do the primary owners and managers have in the industry? So these are a lot of credit questions that bank officers are going to ask, right? They want to know, you know what? Why should we loan to you? How can we  guarantee repayment? You know, are you going to make bad decisions and put  your business and us in unnecessary risk, and then therefore risk our cash right  unnecessarily so? So a lot of times, the business experience of the managers  and operators and owners will be in question because you want to know that  they have a good track record, and you want to know that they have a good  reputation, and they have strong expertise in their into their business industry.  So all of these components go into making a credit decision, market demand. Is  there a proven consumer demand for the product or service? What competition  does the business face? These are all questions that are going to be asked,  especially for a business loan, because anybody, any bank is wanting is going to want to do their due diligence, particularly on individuals that can be deemed  risky, or a market deemed risky, right? Anybody's risky when? If anything's risky,  when you're loaning cash, but you've got to make sure that you mitigate your  risks as much as possible. And the loan process, when will the project become  profitable, or break even? When we're going to be break even, or when are we  going to be profitable, right? How long is that going to take us to become  profitable, right? What assumptions is the business using to make its projections right? How are we projecting out future cash flows, right? What are we doing to  project those and during the business loan process, the bank will underwrite the  same loan on the same project, right? And they're going to compare your cash  flows, and a lot of times they're going to discount those cash flows and be way  more conservative during their appraisal of the business deal, then you may  project, right? So we want to make sure that the profitability is on point, and it 

will happen quickly. You know, a lot of times, especially if it's a startup, there's a  lot of initial cost to go into getting the startup going, and a lot of times before  break even happens might be three or four years, right? So the bank wants to  know, when will you be profitable, and can pay back the loan, maybe even  quicker, what assets will be offered as collateral that could be claimed if the  business is unable to pay the loan, right? So, so you're going to have some  some collateral, some skin in the game, if you know it doesn't go well, maybe it  may be. It's a construction project, and you're building a retail space, and there's 50 retail spaces available for lease, and let's say, in five years, let's say the  location isn't great, and and there's a mass exodus from this city. And you know,  out of the 50 units that you have for lease, only 30 get leased up. And now you  have 20 vacant and you're losing money like crazy. And now the bank says,  Okay, we're going to foreclose on this. We're going to take the property, because your property, your new industrial shopping center, is your collateral. So now  we're going to, you know, we're going to buy it, we're going to take this from you, we're going to shut it down, and then we're going to resell it to somebody else,  so they want collateral as a safety net against non payment. What is the  business risking in the project? Does the business have an adequate stake in  the project to ensure management is motivated to succeed? Right? We want to  make sure that as a bank, that they are going to be driven in their business  venture to be successful. So signing a long term note payable, right? So you  can see April 1, it was signed a five year payable at 8% $420,000 right? So you  can see now that in the ledger, long term notes payable is credited at 120,000  but it is also debited at 120,000 so we credited cash with 120,000 and then we  also denoted long term notes payable at 120,000 you notice how They balance  and they match. So anytime that you add a journal entry when you're accounting for notes payable, you've got to make sure you an inflow or an outflow of cash  has always got to be credited and debited on the same on both sides of the  assets and the liabilities, right? This is kind of an amortization statement. So you can see how it's going to run. You know, our first payment is May, right? So you  can see how the interest is 800 and the principal is 16, 3317, for an ending  payment of or for ending balance of 118366, right? $118,366 so now if you go  down to the second payment, you'll notice that you are paying less interest and  more principal. This is how an amortization schedule works. The more the suit.  Okay? So from So, from payment one, we're paying more interest, and as time  goes, interest payments will decrease while you're paying off more principal and  paying off the loan in 60 months. So now we have an interest expense from  week one, right, $767.12 right? So now we have a cash credit of 24, 3317, right. So we've made a total payment. So we made a principal payment. The long  term no payable at 1666.05 and then we also made the interest expense  payment of $767 so we debited that from our cash. And then now we credited  the cash on the other side for the payment, because we've also reduced down 

our long term no payable. So our total payable went down. 24 3317 because of  the long term notes payable and the interest expense notice you have got to  record on both sides of the journal the credit and the debit. So a company may  issue bonds in order to raise capital for their operations. A bond is a long term  promise to pay a specified amount on a specified date and to pay interest at the  stated intervals. Right? So on a bond, I have $1,000 bond, a 10% annual  coupon. So the coupon means that's my payment, that is my interest payment  that I'm going to receive from the company that I bought the bond from, right?  And let's say the maturity is five years, so then the principal amount will be paid  back at the end of five years, but in that five year span, I'm collecting the 10%  coupon payment, right? That's how I'm getting paid. As an investor in bonds, all  bonds representing the total amount of a loan are called a bond issue. Again,  the $1,000 bond is the issue of the bond or face value. The process of selling  bonds is commonly known as a bond issuance, or issuing bonds. The face value is the amount to be repaid at the end of the bond term. So if we have $1,000  bond five years, 10% coupon, he received the 10% coupon payments over that  five years, and then at the end of the five years, $1,000 is paid back. The  interest rate used to calculate periodic interest payments on a bond is called the  stated interest rate. It. So we got so now let's say we issue bonds, right, and we  raise $180,000 from raising bonds. So now we've got $180 that we can deposit  into cash, but because it's bonds, now we've got a debit cash on the exact same side, because it's now a liability for us, because we've got to pay it back. We  have the cash. We have the actual cash. But eventually, at the end of the 20  years season, July, 1 issue 20 years, 6.5% $5,000 bonds for $180,000 receipt.  So that bond, that $180,000 is repayable at the end of 20 years. So notice, it is  now a liability to us. So paying interest on bonds, right? So December 31 paid  cash for a semi annual interest coupon on bonds. Face value, $5,850 right? So  we sold $180,000 worth of the 5850 bonds at 6% but notice times as fraction of  a year, we have a semi annual interest coupon payment, so we'll get paid the  interest payment every six months, right? So notice how it comes out as a  fraction. 180 over 360 that shows you the payment twice a year. So now we  have the face value times the stated interest rate, $180,000 in bonds times the  6.5% interest rate. So my first interest payment on December 31 will be $5,850  and remember that when you are calculating interest, that you cannot multiply  that by 6.5 you've got to multiply that and decimal form, okay, percentage at . 0655, right? Is very crucial that we don't multiply that by 6.5 that we multiply that  by point 065, that will represent percentage short term debt financing options  every business needs cash to pay its operating expenses, purchasing inventory  and paying the payroll are examples of daily activities that require a business to  earn revenue, right? So we've got to make sure that our business flows.  Operations flow daily, and we need cash to keep it oiled. The payment of an  operating expenses necessary to earn revenue is called a revenue expenditure. 

So anytime that we reinvest into the business outside of capital expenses, you  know, it's a revenue expenditure, and let's say research and development. We  want to continue to research and develop. So that's a revenue expenditure.  Short term debt financing options, obtaining capital by borrowing money for a  period of time is called debt financing, a bank loan agreement that provides  immediate, short term access to cash is called a line of credit, or a credit line. A  lot of times, companies can go in and get a short term line of credit, maybe even on a credit card. Some banks may have a 3 million or maybe some  organizations may have a $3 million line of credit, depending on one how large  the company is, the scope of the credit that is needed, and what their reputation  is and their credit with the bank and how they're going to get paid back, the  interest charge to a bank's most credit worthy customers is called the prime  interest rate, excuse me, the prime interest rate. Not everybody's going to get  that right. You have a flawless credit reputation, and you need to be, you know,  somebody that's that has a very strong balance sheet, that has got that  outweighs equity to debt by a good margin, and somebody that shows a position of financial strength will get the prime interest rate.