CHAPTER 6: CORPORATE LENDING

Needs for Loan

To increase volume of sales by extending longer or more generous

credit terms for desirable business, i.e., finance accounts receivable

To launch a new product

To support production in advance of seasonal demands

To take advantage of cash discounts

To increase production

Needs for Loan

To purchase new replacement equipment that is more efficient than

old equipment

To hire more employees

To buy another company

To buy out a partner

To buy supplies in volume, saving on transportation costs or getting

volume discounts

To take advantage of opportunities

To pay for emergencies

Borrowing divided into:

Short-term to acquire current assets not covered by merchandise

creditor or by the owners investment

Intermediate & long-term to finance both current and fixed assets

Type of Loan

Merchandise credit

Used to finance the acquisition of raw materials to be processed into finished goods
and/or to finance the acquisition of inventory for resale.

Financial capital is used to finance:

Other short-term assets

Long-term assets

Operating expenses

Secured and Unsecured Loans

Secured Loans relies not only on the borrowers promise to pay,

but also on the pledge of some specified property

Unsecured Loans based solely on the credit worthiness of the

borrower.

Bank Line of Credit

Line of Credit the maximum amount the bank is willing to lend by

honoring checks written for amounts exceeding the current account
balance.

Bridging Loan

A short term loan to bridge the gap, for example, between the sale of
a house and the purchase of another house where the payment for
the house being bought is required before the proceeds of the house
being sold is received.

End Financing

Provision of credit to the purchasers for the properties under

construction in a development scheme.

The finance is released progressively prior to the completion.

Leasing

Method of acquiring assets and equipment for use in a business

An alternative to purchase asset.

A lease contract is an agreement that allows the use of equipment or

other assets by a lessee in return for rental payments made to the
lessor during a specified period of time.

when all benefits and risks of ownership are transferred by the lease,
accountants refer to the agreements as a capital lease.

 Operating

leases

are short-term rentals of equipment that

may be cancelled at any time.

A firm that is weak in cash position and will enter into a saleleaseback arrangement.

In this situation, a company sells property to an investor and arranges

for a long-term lease.

Accounts receivables financing

Accounts receivables financing is an accessible, convenient, and

affordable financing solution for business owners looking to increase
their available working capital.

Hardly a newcomer to the business finance market, this funding

strategy has been used to help businesses improve their cash flow
position for over four centuries.

Two types of accounts receivable financing:

Ordinary accounts receivable financing

Ordinary accounts receivable financing involves an agreement under which a financing

institution :-

Purchases the open accounts receivable of its customers or advances them loans
secured by the pledge of such receivables, generally on a one-time basis

Without notice to their trade debtors. Recourse is an arrangement where the

purchaser of the accounts receivable retains the right to return them for a refund if
the debtor doers not pay.

Factoring

Factoring involves a continuing agreement under which a financing

institution

makes credit decisions, collects the accounts, and assumes the credit
and collection function for its clients and

purchases open accounts receivable as they arise

without recourse to the firm for credit losses and

with notice to their trade debtors

Credit Guarantee Corporations

Loans and advances are granted by Commercial banks under CGC

(Small Loans) Guarantee Scheme 1973 for financing any viable
productive economic activity.

Under the scheme, loans and advances granted by Commercial Banks

to small entrepreneurs are guaranteed by CGC up to 60% of the
amount of loans and advances in the event of default.

THE END