Unit 3 - Topic 1

Question 1

3 points - What do banks evaluate for credit quality

Answer 1

• Banks knowledge of the customer
• Management of the business
• Account conduct

Question 2

4 points - What do Asset finance providers consider when looking at the asset to lend

Answer 2

• Knowledge of funding these assets
• Their value
• Useful life expectancy of the asset
• Routes to secondary resale market

Question 3

What does DIMS Test stand for?

Answer 3

Durable, Identifiable, Movable and Saleable

Question 4

3 points - What is Durable?

Answer 4

• Have an anticipated value that covers residual or ballon payment
• Perform required function over period but preferably longer
• Not excessive maintenance and repair

Question 5

2 points - What is Identifiable?

Answer 5

• Tracker technology

- Registered with HPI Ltd for cars or other central hub

Question 6

If not Moveable?

Answer 6

• Must consider landlords waiver

Question 7

2 points How to keep it saleable?

Answer 7

• Adjust profile and term repayments in accordance with amortisation of asset value and and reducing customer balance
• Best assets have multiple resale routes (original supplier, network of trade buyers)

Question 8

2 points - If assets saleability affected by market forces?

Answer 8

• Sale via auction houses

- Equipment resellers

Question 9

What is good title?

Answer 9

• The ownership of the asset has no claim against it. This means the lessor can go on to transfer or sell the asset (ensures tax allowances claimed by lessor)

Question 10

4 points - Difficulties to consider if it is a foreign supplier?

Answer 10

• Quality and reputation of the supplier more difficult to establish
• Supplier terms and conditions can be different to UK standard
• Legislation in foreign jurisdiction can be difficult if quality issues
• More likely to require progress payments, part payments or final payment all before lender has title

Question 11

4 points - How to avoid issues of foreign supplier?

Answer 11

• Request delivery directly from UK agent of the foreign supplier
• Acquire the asset from the lessee if they need payment (sale and leaseback)
• Funder can make progress payments to the lessee
• Extra margin put in for admin work

Question 12

2 points - How to avoid different currency issues?

Answer 12

• Some funders if they have a parent already in that country are okay with it
• Others ask for ‘forward euro currency purchase’

Question 13

What is Merchantable quality

Answer 13

• If an asset is fit for the purpose it was manufactured and sold for

Question 14

8 Points - Supplier due diligence checks

Answer 14

• Checking approved/declined supplier database
• Review supplier company searches and bank searches
• Checking supplier invoice wording and supply term
• Verifying asset pricing compared to trading guide
• Verifying consumer credit licences
• Completing HPI checks
• Checking supplier stocking finance has been paid
• Seeking visual asset inspection (checking serial numbers)

Question 15

2 points - What do inhouse asset managers have for operating leases?

Answer 15

• Experience in particular asset/asset disposal

- Links to local, national and foreign asset resale markets

Question 16

Why funders will not consider longer terms?

Answer 16

• As it is hard to predict asset depreciation over longer than 5 years

Question 17

6 points - Considerations for asset value

Answer 17

• Type and level of asset utilisation
• The extent of maintenance and repair regime
• The rate of obsolescence (due to changing trends, etc)
• Legislative change e.g. Euro 6 emissions standards for commercial vehicles
• Market supply and demand forces
• General state of the economy

Question 18

What is fully asset secure?

Answer 18

• The point in time when the customer balance is either equal to or less than the estimated recovery value]

Question 19

3 points - Name Credit reference agencies?

Answer 19

• Equifax
• Experian
• Call Credit

Question 20

4 points - What information does the Credit reference agencies have?

Answer 20

• Payment reminders
• Arrears
• Defaults
• Voluntary terminations

Question 21

3 points - Sources of public information?

Answer 21

• Electoral Roll
• County Court judgements and Scottish decrees (info stored for 6 years)
• London and Belfast Gazette (insolvency info)

Question 22

What is the CAIS?

Answer 22

• Credit Account Information Sharing - Asset finance providers share information on customers with arrears and trade credit

Question 23

What is the CIFAS?

Answer 23

• The Credit Information Fraud Avoidance System, keys to identifying fraudulent applications for credit, accessed through CRAs.

Question 24

• 4 points - What sources do companies use to check customers?

Answer 24

• CRA data
• Companies house and public information
• CIFAS data
• Own preference to interpret data

Question 25

9 points - Assessing business management

Answer 25

• History (time in business)
• Industry (life cycle, external influences)
• Products
• Market position
• Competitors
• Suppliers (number, negotiating power)
• Customers (number, negotiating power)
• Significant change in ownership/structure
• Details of existing funding relationships

Question 26

Why do businesses normally fail?

Answer 26

• Normally because of management

Question 27

3 points - Possible outcomes to any proposal?

Answer 27

• Agreed as proposed
• Declined
• Agreed on revised terms

Question 28

3 points - Usual extra conditions?

Answer 28

• Offer subject to completion of documentation
• The terms may be adjusted to preserve the providers rate of return (in the event of funding costs or tax rates)
• The provider has the right to withdraw before completion of the funding (changes to the client)