Ppt on Form of Bank Finance by bts14318

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									                                       DEBT SOURCES OF
                                       FINANCE




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                      What is debt financing?
                      n Debt – borrowing money from an outside source with
                        the promise to return the principal, in addition to an
                        agreed-upon level of interest.
                      n Debt is also referred to as „leverage“ in finance.
                      n In contrast – equity financing does not have to be
                        repaid.
                      n The interest rate reflects the level of risk that the
                        lender undertakes by providing the money. Debt
                        financing entails less risk than equity financing, thus it
                        is usually cheaper.




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                      Debt financing - pros
                      n Maintained ownership – allows the founders to retain
                            ownership and control of the company (in contrast to equity
                            financing)
                      n     Greater degree of financial freedom – provides business with
                            a greater degree of financial freedom than equity financing as
                            debt obligations are limited to the loan repayment period, after
                            which the lender has no further claim on the business
                      n     Easy to administer – lacks the complex reporting requirements
                            accompanying some forms of equity financing
                      n     Tax deductions – interest payments can be deducted from
                            business income taxes (lower interest rate)
                      n     Less expensive – tends to be less expensive over the long
                            term than equity financing




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                      Debt finanicng - cons
                      n Repayment – shortages in CF may make regular payments
                            difficult (incl. penalties, taking possession of collateral etc.)
                      n     High rates – interest rates vary with macroeconomic conditions,
                            the borrower´s history with banks, business credit rating,
                            personal credit history
                      n     Impacts borrower´s credit rating – debt increases leverage,
                            failure to make payments adversely affects business credit
                            rating and its ability to obtain further financing
                      n     Cash and collateral – necessary to make sure the business will
                            be generating sufficient CF, it is asked to put up collateral on the
                            loan
                      n     Availability limited to established businesses – it can be
                            difficult for unproven businesses to obtain loans, the amount of
                            money SMEs may be able to obtain via debt financing is likely to
                            be limited, so they may need to use other sources of financing
                            as well




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                      Bank loan – factors influencing
                      interest rates
                      n Factors influencing the price of the loan:
                      - Macroeconomic factors: the level of inflation; the volume of M2
                            money supply and higher monetary aggregates and politics of
                            money supply regulation; velocity of money circulation; level of
                            GDP and its growth rate; level of investments and rate of
                            savings; discount rate of the National Bank

                      -     Microeconomic factors:
                      -     creditor´s costs of obtaining funds; level of risk of the financed
                            project; period of a loan (maturity); relation between short-term
                            loan sources and long-term sources; amount of a loan; backing
                            of a loan; individual rate of profit (project, business, industry);
                            NPV of investment project




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                      The loan process
                      n Documents necessary to submit:
                      - loan application,
                      - business plan,
                      - financial statements,
                      - documents of legal capacity (trading certificate,
                        extract of companies´ register),
                      - other documents may be required.
                      n After submitting the loan application and the
                        accompanying documents – the employee of the
                        bank loan department prepares the loan proposal,
                        particularly evaluates creditworthiness of the client –
                        containing evaluation of personal and objective
                        creditworthiness



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                      Collateral
                      n C. – an item that is pledged to guarantee
                        repayment of a loan; comes into play when a
                        business needs to make a secured loan
                      n The nature of collateral acceptable depends
                        on the type of a loan, structure, tenor,
                        amount, etc.




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                      Types of collateral
                      n Real estate – land, buildings are used (especially for
                            medium to long-term loans and revolving loans of
                            significant size)
                      n     Principles of this agreement:
                      -     banks accept real estate as a whole (not parts),
                      -     it is necessary to limit the possibility to sell real
                            estate,
                      -     insurance benefits for events of damage have to be
                            pledged for account of the bank,
                      -     banks usually require the present market value of
                            pledged real estate to exceed the amount of the loan
                            by 20 -30 %


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                      Types of collateral (continued)
                      n Tangible assets – called „lombard“
                      n „Lombard loan“ – usually means only loans secured by short-
                        term securities
                      n This type of collateral – risky – banks usually require their value
                        to be twice the loan amount at least
                      n Intangible assets – very rarely used as collateral, only in the
                        case of short-term loans of large companies (technology, know-
                        how, trademarks, software, accounts receivable)
                      n Guarantor (the third party) – an aval, may enter the loan
                        relation between the bank and the client, may be a specialized
                        bank (SZRB in Slovakia) or another guarantor (legal or physical
                        entity)
                        - if the client does not repay the loan, the guarantor has to take
                        on his obligations




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                      Long-term and medium-term debt
                      sources of finance
                      n financial loans,
                      n supplier loans,
                      n bonds (alternative sources                             – characterized in the
                            following chapter),

                      n special debt forms (alternative sources -
                            leasing, franchising, forfeiting                       – characterized in the
                            following chapter).




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                      Short-term debt sources of finance
                      n trade credit,
                      n permanent and semi-permanent accruals,
                      n bank loans (overdrafts, short-term specific
                        loans, lombard loans, paper loans, specific
                        credit services),
                      n advance payments,
                      n factoring (alternative source - characterized in following chapter),
                      n commercial papers (alternative source – characterized in
                        following chapter).




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                      Long-term debt sources of finance




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                      Financial loans – term loans
                      n based on a contract requiring the borrower to
                        make periodic payments of interest and
                        principal to the lender
                      n the commonest form – loan financing the
                        development needs (also called „investment
                        loan“), also can be used to finance operating
                        needs beyond one year
                      n resources to repay it – generated by the
                        financed project, therefore creditors assess
                        potential profitability of projects



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                      Financial loans – term loans
                      (continued)
                      n The creditors generally:
                      - require backing by first-class personal or property
                        guarantee,
                      - limit the amount of the loan (debtor shares in
                        financing the project – at least 30 to 50%),
                      - try to agree as short maturity as possible (according
                        to the character and limits of the financed project),
                      - analyse in detail financial and overall economic
                        situation of the applicant incl. expected income, long-
                        term projections of financial situation.




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                      Financial loans – term loans
                      (continued)
                      Characteristics:
                      - 1 – 10 or 15 years maturity,
                      - repaid regularly by regular instalment payments using
                        several types of term-loan amortization schedules,
                      - they are secured by different types of collateral,
                      - the interest rate fixed or floating; the longer maturity,
                        the more often the floating rate is used,
                      - financing large projects – the bank consortia to
                        diversify risks.




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                      Financial loans – mortgage loans
                      n Mortgage – a form of loan that is normally secured on freehold
                            property; maturity 15 – 30 years, provides a business with an
                            opportunity to purchase, build, reconstruct and maintain real estate;
                      n     provided by specialized banks (mortgage banks) or commercial banks
                            having the license to provide them;
                      n     in Slovakia – 9 banks: ČSOB, Dexia Banka, Istrobanka, OTP Banka
                            Slovensko, Slovenská sporiteľňa, Tatrabanka, UniCreditBank,
                            Volksbank, VÚB
                      n     in case of not fulfilling obligations – the bank can sell pledged real
                            estate
                      n     funds through mortgage bonds
                      n     limits – percentage of the value of mortgage collateral to which banks
                            may grant mortgage loans (up to 60% market value of pledged real
                            estate)
                      n     borrower pays interest and periodically repays principal
                      n     SR – particularly house building




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                      Revolving credit line
                      n intermediate source (2-3 years); short-term
                        loan is repaid by another short-term loan –
                        „revolving“
                      n determined maximum amount that can be
                        borrowed over a period, may be collateralized
                      n rather risky (liquidity), expensive




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                      Export loans; supplier loans
                      n Export loan – special form of advance
                            payment to exporter granted by banks

                      n Supplier loan – medium- to long-term loans
                            granted by suppliers of equity, interest
                            included in price




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                      Short-term debt sources of finance




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                      Trade credit
                      n typical short-term loan associated with agreed
                            delayed payments for goods/services; spontaneous –
                            generated by day-to-day operation; not financial loan
                            (form of goods/services paid for later)
                      n     readily available to most businesses, payment terms
                            may differ between suppliers
                      n     the oldest loan form, simplifies sales
                      n     interest included in price, when promptly paid –
                            discount (2/10 net 30)
                      n     secured: open account up to agreed limit; written
                            debenture; bill of exchange


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                      Trade credit (continued)
                      n Advantages:
                      - convenient / informal / cheap,
                      - available to companies of any size.
                      Factors determining terms of trade credit:
                      - tradition within industry,
                      - bargaining position of the two parties.




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                      Permanent and semi-permanent
                      accruals
                      n Accrual – an expense that has been incurred
                        but has not yet been paid – (1) accrued
                        wages and salaries, (2) accrued taxes
                      n Represent spontaneous financial source




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                      Bank overdrafts
                      n Enable to take more money out of a bank
                        account that it contains, granted by banks on
                        overdraft account, combine current and loan
                        accounts; credit, zero or debit balance
                      n Debit balance should not be below agreed
                        loan limit




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                      Bank overdrafts – pros and cons
                      n Advantages:
                      - flexibility up to agreed limit
                      - interest paid for really drawn moned for real
                        period of loan
                      n Disadvantages:
                      - bank´s right to withdraw facility at short
                        notice,
                      - issue of security,
                      - more expensive than special loans


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                      Short-term special loans; lombard loan
                      Short-term special loans
                      n granted by banks for special agreed purposes
                      n finance short-term operational needs (seasonal
                        stocks, seasonal costs, temporary shortage of funds
                        etc.)
                      n usually repaid with one payment including principal
                        and interest
                      Lombard loan
                      n granted against the pledged securities (or accepted
                        bills of exchange, accounts receivable, stocks,
                        bullions); used to bridge personal or business
                        financial shortfalls; lombard loan equates to
                        percentage of pledged assets market value



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                      Advance payments
                      n currently used in some industries (ship
                        building, manufacturing of large equipment,
                        house building etc.)
                      n the part (or the whole) of contractually due
                        sum paid in advance by buyers to suppliers
                      n limited use in highly competitive industries




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