IFS Topic 4

by defaults and excesses usage

from the interest they charge the cardholder, which includes fees for payments

from retailers or those outlets that accept cards

designed to assume all risks of importing but is provided without recourse to the exporter in the even of non payment at the sale of good

designed to assume all risks of importing but is provided without recourse to the exporter in the even of non payment at maturity

there are complicated terms and conditions

can be more costly than other forms of credit if the full amount is not paid off in each charging period

a credit rating may be damaged if payments are missed or late

they can be expensive if not paid off

why the overdraft is needed

their ability to service the debt

their ability to honour the agreement with the bank, such as working within the overdraft limit

the duration or time period for which the facility is required

yes

no

business is treated as the owner of the asset for tax purposes and is able to claim capital allowances

business is not tied to any funding agreement or onerous conditions

cost of obtaining the asset would be less than if the business were to obtain it through a hire purchase or lease agreement

asset is owned by the business and cannot be repossessed

outright purchase

cheque payment

hire purchase or lease arrangements

cash

they offer free, unsecured credit, provided that the balance is paid in full and on time

more convenient and safer than carrying cash

provide a convenient payment method for purchases made on the internet or by telephone

provide incentives such as reward points

fees payable if the loan is repaid early, particularly if the loan interest has been fixed.

an arrangement fee for arranging the facility

security fees including legal costs for taking the underlying security

drawdown fees taken when each drawing is made

no

yes

most loans have specifically negotiated terms and conditions (covenants) attatched for the duration of the facility

there is an early repayment fee

loans are less flexible than overdrafts

there could be a refinance risk if the loan is provided on an interest only or bullet repayment basis.

the business is able to spread the cost of the asset over a longer period of time and match payments to its income

the business may have access to a higher standard of equipment than it could have afforded to buy outright

an initial deposit or advance payment may be required

leasing company carries the risk if the equipment breaks down

non-recourse factoring

course factoring

on course factoring

when a bank in the exporter's country acts on behalf of an importer for collecting and sending payment

when a bank in the importer's country acts on behalf of an exporter for collecting and sending payment

qualifying criteria

requirements

availablity

criteria

an arrangement fee for arranging the facility

security fees including legal costs for taking the underlying security

drawdown fees taken when each drawing is made

fees payable if the loan is repaid early, particularly if the loan interest has been fixed.

in the even of a default, the provider can reposseess the asset

business will end up paying more for teh asset than it would have done

It is more expensive than a business loan

interest has to be serviced on the loan

yes

no

is used for goods that are moved by ship - acts as receipt of shipment and gives title to the goods.

is used for goods that are moved by air - acts as receipt of travel and gives title to the goods.

staff need to be trained both in the technical and administrative issues involved

accepting cards can increase a business's exposure to fraud

costs are charged per transaction which can be expensive

they can be expensive to hire

short term ( under one year)

long term (7 + years)

extra long term (25+ years)

medium term (1-7 years)

true

false

irrivocable

sealed

binding

an instrument that generally operates with a bill of exchange through the international banking system where the exporter's bank ensures that a bill of exchange is accepted by the exporter before the documents of title for the goods are released to the exporter.

an instrument that generally operates with a bill of exchange through the international banking system where the importers's bank ensures that a bill of exchange is accepted by the importer before the documents of title for the goods are released to the importer.

the facility is quick and easy to obtain

borrowers pay a monthly amount back for the facility

Borrowers only pay interest when ovedrawn and to the level of usage

The bank can review and adjust the level of the overdraft facility depending on the circumstances

assets

liabilities

debt notes

invoices

There may be security required

There is an arrangement fee for the facility

There is a monthly repayment

Overdraft facilities are repayable on demand

documentary collections

payment in advance

documentary letters of credit

open account trade

borrowers are guaranteed funds for an agreed period, unless there are breaches in any of the loan conditions

loans can be provided for the lifetime of the equipment or assets being purchased

The loan provides teh ability to match the cash flows that the business expects will be generated from teh asset against the repayment profile of the loan

interest rates may be fixed (or hedged) for the term of the loan, so borrowers would know the level of repayments throughout the life time of the loan

reduce administration overheads

increase working capital

purchase assets

reduction in profit margins due to cost

not suitable for some businesses

business will need to finance all working capital from debtor book asset

will have an adverse affect on supplier relationships

reduces scope for further lending

providers will need to vet customers and influence way in which business deals with its customers

customers are dealt with directly by the factoror

will affect credit score in the future

a legal instrument that evidences the fact that a customer - an exporter - has promised to pay an importer a specific amount of money on a given date.

a legal instrument that evidences the fact that a customer - an importer - has promised to pay an exporter a specific amount of money on a given date.

access to unsecured credit, instant payment for purchases, access to funds 24 hours a day, fraud protection, a flexible limit

access to unsecured credit, instant payment for purchases, access to funds 24 hours a day, fraud protection

cash withdrawals, access to unsecured credit, instant payment for purchases, access to funds 24 hours a day, fraud protection, a flexible limit

recourse factoring

discourse factoring

factoring

oncourse factoring

an initial deposit may be required

leasing agreements can be more complex to manage than buying outrigh

when a business leases an asset, it does not own it, although it may be allowed to buy the asset at the end of the agreement.

the business can be locked into inflexible medium or long term agreements which may be difficult to terminate

overdrafts do not provide a discipline in terms of repayment, by their nature they are uncommitted revolving credits

the facility may mask difficulties the business is experiencing, with problems only identified when the account exceeds its limit.

overdraft funding is provided on demand, which means the bank could remove the facility at any time

businesses can become reliant upon overdrafts, allowing working capital management to slip

A weak form of security that allows the bank to retain possession of the goods until the loan is repaid

A strong form of security that allows the bank to retain possession of the goods until the loan is repaid

(senior) interest cover, cash coverage, balance sheet and cash flows

(senior) interest cover, gearing (or leverage), cash coverage, balance sheet and cash flows

gearing (or leverage), cash coverage, balance sheet and cash flows

(senior) interest cover, gearing (or leverage), cash coverage

business does not need large amounts of cash to buy an asset

regular amounts are fixed which makes budgeting and cash flow management easier.

provider may be more willing to allow a business to make small regular payments

interest rate paid under the agreement is normally less than the interest rates for traditional bank loans or overdraft facilities

computers

property

motor vehicles

equipment

furniture

industrial machinery

plant

factoring

lease fianance

invoice financing

asset fianance

where the seller invoices the overseas customer, stating when they expect to receive payment

where the buyer invoices the overseas customer, stating when they expect to receive payment

unlikely to lead to debt problems, as they have to be paid off in full each month

users find it easier to budget responsibly with a charge card

can be paid off in full each month

they have additional rewards, discount schemes or perks for users.

financing the purchase of fixed assets

providing short-term liquidity for cash flow and working capital cycle including the financing of imports and exports

financing the purchase of property for investment purposes

covering contingent liabilities, which can be defined as a future liability that may or may not be incurred

recourse factoring

discourse factoring

non-recourse factoring

on course factoring

finance leasing

contract leasing

operating leasing

asset leasing

funding rapid growth in sales and improve cash flow

are committed facilities

useful info about credit standing of customers can be gained

helps credit score

not repayable on demand

assist with financial planning

higher than conventional bank debenture based overdraft facility

help to smooth cash flow

assists with debt reconciliation

protection from bad debts

they do not provide revolving credit in the way a credit card does

if a cardholder fails to repay the balance each month, they may incur late payment charges and a deterioation in the credit rating

these products can charge high annual fees and additional charges for some types of card use

they cant be paid off in full each month

bi-annually

monthly

6 monthly

annually

an invoice

insurance documents

a bill of lading

certificate of origin