Topic 3 - Credit Products / Services

Question 1

Key features of an overdraft

Answer 1

• high degree of flexibility - allows customer to overdraw current account upto agreed limit subject to AR. Arrangement fee usually paid for this overdraft.
• repayable on demand so not an intensive terms and conditions
• helps cover short term borrowing requirements - iron out fluactuations in cash flows- e.g buying stock using overdraft and the cash from sales will return the position back into credit.
• debit interest charged on overdrawn position
• usually unsecured but a security may be required depending on the size

Question 2

Hard core borrowing and how to restructure?

Answer 2

When an account remains permanently in debit - this is referred to as hard core borrowing. Restructure the hard core borrowing element into a term loan or a RCF.

Question 3

Pros and cons of overdraft

Answer 3

Pros - more flexible; quick and easy to access; cheaper if undrawn

Cons - repayable on demand; more expensive if continuous being used and going above limits; fee to pay for the overdraft

Question 4

Features of a term loan

Answer 4

• committed term facilities
  fixed or floating - floating more usual; fluactuate at a margin over bank base rate or LIBOR rate.
• drawdown may be in tranches or instalments on certain conditions being met
• repayments match cash flow of the loan - even includes holiday, bullet or balloon repayment schedules.
• normal for security to be taken
• covenants are formal agreements made at the time of the loan - terms breached then EOD.
• secured or unsecured - unsecured more expensive

Question 5

Pros and cons of termloan

Answer 5

Pros - makes budgeting easier; not repayable on demand.

Cons - less flexible; more expensive for short term

Question 6

Features of a home purchase loans

Answer 6

• amount available to borrow - stipulated multiple of the customer’s salary or a multiple of joint borrwer’s combined salaries
• 3 main lending products - bridging loans, self build finance and equity capital release loans.

Question 7

Key features of a bridging loan

Answer 7

• required when a major purchase preceded a major sale so used for house purchase and sale transactions -short term and repaid from a specific source
• England and Wales - security is by way of letter of undertaking By solicitors
• Scotland - security by an assignation - letter from customer addressed to the solicitor requesting that proceeds are sent to the bank. Irrevocable so comfort taken by the bank.
• Business customers need bridging finance for the purchase of new premises before the old ones has been sold or when the customer is buying a new biomes prior to selling the present one

Question 8

Equity / capital release loans

Answer 8

• lending a certain % of equity in the customer’s property-security over the property
• lending on the appreciation of the property
• rates for these loans linked to bank mortgage rates
• purpose similar to personal loans with a longer tenor

Question 9

Self build finance

Answer 9

An advance that will finance the building, conversion or renovation of a property as the customer’s principal residence.
Structures as an overdraft to allow customer to drawdown at the end of each stage following formal certification of stage payments from a qualified architect, engineer etc. Funding could be done in advance based upon the individual’s LTV - low LTV.

Question 10

Stages of a self build project

Answer 10

• completion of a foundations
• delivery of kit if building from a kit structure
• erection of kit
• building made wind and watertight
• formulation of rooms to plasterboard
• final stages

Question 11

Key features of a personal loan

Answer 11

• normally for the purposes of consumer purchases - eg cars, holidays
• interest charged at a flat rate - not usually secured.
• usually approval determined by credit scoring applicants
• falls within the regulated agreement criteria as set out in the consumer credit acts
• some of these carry life cover and option to purchase unemployment,sickness cover etc.

Question 12

Budget account loans

Answer 12

Enables customers to spread the cost of their regular bill and expenses over a year
Adds up all the bills and expenses and then the total is advanced by the bank and then the monthly repayment comes from the monthly salary
Smoothes our cash flows
Kinda like the travel card season ticket loan from work.

Question 13

RCFs

Answer 13

Guaranteed max amount of loans available to the firm.

• restricted for particular customers
• int charged on a daily basis and applied monthly
• flexible than a term but a fee paid on undrawn amount

Question 14

Credit cards

Answer 14

• purchase of goods and services subject to an agreed overall limit
• not necessary to have a main current account
• company credit cards - helps control business expenses and mortgage cash flows

Question 15

Asset based lending

Answer 15

Using assets of the firm to secure the loan - weight placed on the market value of the collateral.

Question 16

Leasing

Answer 16

Finance tangible assets e.g ships and cars. Secured by a lease contract which allows the lessee the use of the tangible asset for a specified period of time by making payments to the owner(lessor)

Question 17

Operating vs finance leases

Answer 17

Op - short term contracts and can be terminated at short notice.lessor pay maintainencecosts whereas financial are long term with terms equal to the economic life of the asset - lessee has no right of cancellation and has no legal ownership but bears cost of maintainence

Question 18

Lending process steps

Answer 18

Finding prospective customers - evaluating customer’s CAMPARI - making site visits and evaluating customer’s track record and financial condition - asssssing loan collateral and signing loan agreement - monitoring compliance with loan agreement and other customer service needs

Question 19

Features of a typical loan agreement

Answer 19

Promissiory note - loan commitment agreement - collateral - covenants (affirmative and negative) - borrower guarantees or warranties - eod

Question 20

After life of the loan

Answer 20

• carrying out reviews on a periodic basis (record of borrower payments; quality and condition of collateral; completeness of loan docs; evaluation of borrowers financial condition; reviewing largest and higher risk loans most frequently; acceleration if wider economic or industry experiences problems

Question 21

Hire purchase

Answer 21

Agreement to hire an asset with an option to purchase at termination

Question 22

Pros and cons of hire purchase

Answer 22

Adv -small initial outlay; easy to arrange; available when bank finance may not be; tax relief - int payment are tax deductible; fixed rate; certainty of repayments schedule
Disadv - more expensive than cash purchase; fixed nature may mean impossible or expensive to make early termination.

Question 23

Adv of leasing

Answer 23

• tax deductible - int payments and depreciation

- alternative source of finance when bank lending not available

Question 24

Key features of factoring

Answer 24

Raising of funds against the security of the company’s debts

Question 25

Invoice discounting

Answer 25

Company pledges selected invoices to a finance house and guarantees they will be paid - invoices sold at a discount

Question 26

Franchising

Answer 26

Granting of a license by one person to another which entitles the franchise to trade under the brand name and make use of their brand to secure customer - no need to come up with a customer idea, readily available support network, group discount from suppliers. Disadv: locally translatable, medium to long investment, big upfront investment required, lack of compete control.

Question 27

Benefits to franchisor

Answer 27

• can expand without needing too much capital; broad distribution network; high level of commitment from franchises who have skin in the game; benefits of the entrepreneural skills resulting in better performance

Question 28

Disadv for franchisor

Answer 28

• poorly chosen franchisees can result in huge problems; could become resentful; no equity stake in the business; franchise needs to ensure that firms management and monitoring systems are established and maintained transposable over a wider area.

Question 29

Equity finance

Answer 29

Raising equity finance by giving by a share of the business - venture capitalist (after business Angels are done) and business Angels(early stage)

Adv - security not usually required; longer term investment; provide strategic direction for the business

Disadv : dilution of ownership and may be some oversight and control from vc firms.