Unit 3 - Topic 1 Flashcards
Credit Approval and underwriting in asset finance
3 points - What do banks evaluate for credit quality
- Banks knowledge of the customer
- Management of the business
- Account conduct
4 points - What do Asset finance providers consider when looking at the asset to lend
- Knowledge of funding these assets
- Their value
- Useful life expectancy of the asset
- Routes to secondary resale market
What does DIMS Test stand for?
Durable, Identifiable, Movable and Saleable
3 points - What is Durable?
- Have an anticipated value that covers residual or ballon payment
- Perform required function over period but preferably longer
- Not excessive maintenance and repair
2 points - What is Identifiable?
- Tracker technology
- Registered with HPI Ltd for cars or other central hub
If not Moveable?
- Must consider landlords waiver
2 points How to keep it saleable?
- 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)
2 points - If assets saleability affected by market forces?
- Sale via auction houses
- Equipment resellers
What is good title?
- 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)
4 points - Difficulties to consider if it is a foreign supplier?
- 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
4 points - How to avoid issues of foreign supplier?
- 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
2 points - How to avoid different currency issues?
- Some funders if they have a parent already in that country are okay with it
- Others ask for ‘forward euro currency purchase’
What is Merchantable quality
- If an asset is fit for the purpose it was manufactured and sold for
8 Points - Supplier due diligence checks
- 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)
2 points - What do inhouse asset managers have for operating leases?
- Experience in particular asset/asset disposal
- Links to local, national and foreign asset resale markets
Why funders will not consider longer terms?
- As it is hard to predict asset depreciation over longer than 5 years
6 points - Considerations for asset value
- 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
What is fully asset secure?
- The point in time when the customer balance is either equal to or less than the estimated recovery value]
3 points - Name Credit reference agencies?
- Equifax
- Experian
- Call Credit
4 points - What information does the Credit reference agencies have?
- Payment reminders
- Arrears
- Defaults
- Voluntary terminations
3 points - Sources of public information?
- Electoral Roll
- County Court judgements and Scottish decrees (info stored for 6 years)
- London and Belfast Gazette (insolvency info)
What is the CAIS?
- Credit Account Information Sharing - Asset finance providers share information on customers with arrears and trade credit
What is the CIFAS?
- The Credit Information Fraud Avoidance System, keys to identifying fraudulent applications for credit, accessed through CRAs.
- 4 points - What sources do companies use to check customers?
- CRA data
- Companies house and public information
- CIFAS data
- Own preference to interpret data
9 points - Assessing business management
- 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
Why do businesses normally fail?
- Normally because of management
3 points - Possible outcomes to any proposal?
- Agreed as proposed
- Declined
- Agreed on revised terms
3 points - Usual extra conditions?
- 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)
