Flashcards in Topic 3 - Credit Products / Services Deck (29):
Key features of an overdraft
- 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
Hard core borrowing and how to restructure?
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.
Pros and cons of overdraft
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
Features of a term loan
- 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
Pros and cons of termloan
Pros - makes budgeting easier; not repayable on demand.
Cons - less flexible; more expensive for short term
Features of a home purchase loans
- 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.
Key features of a bridging loan
- 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
Equity / capital release loans
- 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
Self build finance
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.
Stages of a self build project
- 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
Key features of a personal loan
- 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.
Budget account loans
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.
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
- 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
Asset based lending
Using assets of the firm to secure the loan - weight placed on the market value of the collateral.
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)
Operating vs finance leases
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
Lending process steps
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
Features of a typical loan agreement
Promissiory note - loan commitment agreement - collateral - covenants (affirmative and negative) - borrower guarantees or warranties - eod
After life of the loan
- 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
Agreement to hire an asset with an option to purchase at termination
Pros and cons of hire purchase
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.
Adv of leasing
- tax deductible - int payments and depreciation
-alternative source of finance when bank lending not available
Key features of factoring
Raising of funds against the security of the company’s debts
Company pledges selected invoices to a finance house and guarantees they will be paid - invoices sold at a discount
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.
Benefits to franchisor
- 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
Disadv for franchisor
- 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.