Chapter 13: Products and Services for Business Clients Flashcards
The five main types of risk that lenders must evaluate when they recieve a request for financing from a buisness
KNOW 3
- Market risk
- requires an examination of the economy in which the company operates - Industry risk
- is the next type of risk to look at after the lender is satisfied with their analysis of market risk - Sectoral risk
- Business / financial risk
- Environmental risk
The three more common lines of credit are set up to finance
- Accounts receivable
- when a business makes a sale to another business and gives that customer a period of time in which to pay for the purchase - Inventory
Businesses that manufacture or produce products will have to purchase often large dollar amounts of inventory that they will use to produce the items that they will eventually sell to their customers
-businesses to do not want to tie up alot of their cash to purchase inventory that may not be used for another month or longer - Procurement
Procurement lines of credit tend to be reserved for larger business with greater amounts of cash flow and larger values of retained earnings
-require a number of months to procure equipment
-large contract ex. roads, schools
-large amounts of spending before payments
-not 100% of the loan acquired at once, vary within the range of 25% - 40% at a time
Banker Acceptance
are an alternative for a client that wants to borrow money at a cost that is less than their bank’s prime rate
“prime-minus”
- issued by a company, guaranteed by a commercial bank (guarantee fee / stamping fee of 0.0025% of total face value of the BA)
- promissory notes issued by a company and sold to investors
- 30 days - 180 days short-term loan
- sold at a discount from face value
6 ways term loans can help a business KNOW 3
Cost effective products
- Enable it to purchase new assets.
- Refinance existing debt, expansion, or acquisitions.
- Conserve capital (avoid paying cash and depleting its reserves of cash) by spreading the repayment period over a number of year (usually to a maximum of seven years).
- Take advantage of low floating rates of interest.
- Provide certainty by obtaining fixed-rate financing that locks-in their borrowing costs.
- Obtain credit insurance to protect the company in the event of unforeseen problems.
3 Different combinations businesses use to negotiate their term loan payments
- Monthly, quarterly or semi-annually with each payment made up of principal and interest.
- Monthly interest-only with principal payments made quarterly or semi-annually.
- Quarterly interest-only with principal payments made semi-annually.
Commercial leasing products
are another way for a business to finance their use of certain types of assets.
The bank or leasing company owns the asset
Advantages of Commercial Leasing products
KNOW 2
- Preservation of capital – A lease can free-up the client’s capital and avoid using their lines of credit.
- Tax circumstances – Leases can provide the ability to expense the monthly payment rather than deal with tax rules that limit depreciating the cost of a purchased asset.
- Rate of change / obsolescence – By choosing shorter lease periods, the business can take advantage of technological changes that would allow them to replace a leased item sooner, and with a better version of the asset than they could under a term loan.
- Payment flexibility – Leasing can often accommodate varying cash-flow patterns and tax situations better than term loans might.
- Another source of capital – If the business structures its lease under a “buy back” arrangement (it can buy the equipment at an agreed-upon value at the end of the lease) it can give the business another source of capital at that time.
Commercial Mortgages
The major difference from a term loan is the length of amortization of a mortgage.
Commercial mortgages can be structured to have amortization periods of up to twenty years
Fixed and Floating interest rates are offered
5 Risks associated with commercial mortgage
- Market
- Industry
- Sectoral
- Business
- Environmental
6 products and services that are amongst those not, typically, offered by the Canadian banks include
KNOW 3
Pension fund management
Employee group-benefits
Export-financing
financing
Commercial paper
alternative to borrowing money at prime
- promissory notes issued by companies and sold to investors at a discount of theie face value at maturity up to one year
- no guarantee from the banks
- large, stable and well known to convince investors to buy the promissory notes.
- no stamping fees
- a bigger dicsount
Back-up Lines of Credit
Safety net for Bankers Acceptance and Commercial Paper
If a company already issed CP’s or BA’s, they would find that investors would have much less interest to buy any more of those investments.
If a company needed to borrow more money, they would get a back-up line of credit until market conditions improve and they would then again be able to issue more BA’s or CP’s
