04) Lending products Flashcards
How often should you review facilities?
at least annually
Why are overdrafts useful
not all businesses paid in advance for their services, adds flexibility for recieveables
only pay interest on what you use as well
what is hardcore debt
when the overdraft is in use at the end of every month and there is not sufficient credit turnover to clear this during the month.
What should the RM consider before granting the overdraft?
why the overdraft is needed
duration that the facility will be needed
ability to honour the agreement -look at cash flow and forecasts
ability to service the debt (interest)
Name 3 key features of an overdraft?
Usually the simplest, cheapest and most flexible form of lending.
- interest charged on actual amount drawn
- overdraft facilities repayable on demand
- usually have an overdraft arrangement fee
- reviewed periodically
- depending on size, may require security
- impacted by the lending code-must be provided alongside clear and fair information
Name Two forms of sales/receivables financing
Factoring and invoice discounting
Factoring - what is it?
involves a business selling its invoices. used to reduce admin costs. factoring company processes the invoices and can provide ledger management services. Factoring company will advance up to 85% of approved invoices.
Difference between recourse and non-recourse factoring?
non-recourse factoring the factoring compnay assumes teh bad debt risk, obviously more expensive.
Invoice discounting? what is it and how is it different to factoring?
Another way of providing funds against sales ledger, but the company retains full control of the sales ledger admin wise. Invoice discounter will review business, records, systems and credit score will then agree to advance a %.
What is the difference between a credit and a charge card?
charge cards agreed payment date, credit cards no date it is a revolving credit facility. both are subject to the lending code
Name two ways a business can obtain equipment and resources?
outright purchase
hire purchase or lease arrangements
Detail key facts about Hire purchase:
Hire purchase: allows the cost to be paid over a fixed period of time, when all payments are made the business then owns the asset. can however claim tax allowances back from beginning of the contract
Leasing can take 3 forms: detail them and the differences between them
Leasing means the business never owns the asset outright, some arrangements allow the customer to buy at the end of the contract. lessor is the company, lessee is the customer
01) Finance leasing-long term lease, business responsible for maintaining the asset
02) operating lease - not needed for entire working life of an asset, repsonsible for maintanance and insurance, lessor retains ownership so not featured on SOFP.
03) contract hire used for company vehicles.
No asset finance is subject to the lending code
What is franchising and why would a business do it?
Franchising is where a successful business lets another use its name and idea, usually for a fee, royalties of percentage of profits
Describe four Intl trade finance instruments?
1) Bills of exchange - legal instrument that evidences an importer promising to pay an export a specific amount by a specific date. cheque is an example of this
Documentary credits - usually work in tandem with bills of exchange, they detail documents and conditions required for importer to take control of exporters goods
Documentary collections - when the banks work together to collect payment. shipping documents sent to bank who then authorise payments. Bank may forward this payment or avalised
Bills of Lading - used for goods transferred by ships, documents issued to show they are in transit, if clean then not damaged.
Four methods of payment for intl trade finance?
01) payment in advance
02) documentary letters of credit
03) documentary collections
04) open account trade
best method of payment for the exporter?
payment in advance - pays for goods up front so no risk to the exporter, not ideal for new relationships or moving into new markets. used when concerns over customers ability to pay. may put exporter at competetive disadvantage (do they have monopoly) as importers want to delay paying
outline the key features of documentary letters of credit?
is done via the bank system where customer and banks interact. good for exporters and payment will be made on time if documentation is accurate. can forward payment, only credit risk when importing bank grants facility to importer. secure for export customers.
best trade payment method for a long lasting relationship?
Open account trade, similar to offering credit to a UK customer-highest risk of non payment , majority of UK intl trade runs on this method.
Can a bank assist with financing trade?
Yes numerous methods of doing this
Outline the key features of EFG?
- 3 months to 10 years
- part of a BIS scheme
