Credit is a method of selling goods or services without the buyer having cash in hand. A credit card is only an automatic way of offering credit to a consumer. A credit card is basically a plastic card with a magnetic strip invented with the intention to simplify the complicated banking process for an individual in case he/she is short of cash, be it something casual like shopping or something severe like an emergency situation. The dictionary defines a credit card as āA card which can be used to obtain cash, goods or services up to a stipulated credit limit. The supplier is later paid by the credit card company which in due course is reimbursed by the credit card holder who will be charged interest at the end of the credit period if money is still owing.ā The word credit comes from Latin, meaning ātrust. This means that usingĀ Continue reading
Credit Management
Credit Management Concepts: Know Your Client
A cardinal rule in banking is the concept of āKnow your clientā. This means exactly what is says. The banker will do all he can to find out as much as he can about the company and the client. In this no information is too small or too immaterial since they will fit into a larger picture and the fate of the facilities extended may depend upon it. It has to be always remembered that the project may appear sound, the documentation perfect and the financials impeccable. However, if the intent is to cheat, it could cause severe losses to the Bank. Banks are always aware that a dishonest man is also a very clever person. Additionally the dishonest person has the advantage in that the innocent banker believes him to be a good, honest soul. He knows he is not; he knows he intends to cheat the banker andĀ Continue reading
Commercial Credit Analysis: Collateral
Collateral is the security given to the bank as a safeguard for the facility/ facilities advanced. This is effectively the Bankās insurance that should there be a default, the bank has something to fall back on to either recover in part or full the amount advanced. It is important for a prospective borrower to realize that there is no such thing as a standard collateral. The nature of the collateral, the amount and the percentage of the facility advanced that it covers will vary from borrower to borrower and from bank to bank. However, there are some standard collaterals. The collateral sought for an overdraft and working capital facilities is the hypothecation of book debts and stocks. The amount advanced will be usually a percentage of the total value ā the percentage held back being known in banking connotation as the margin. This is an additional safeguard for a bankĀ Continue reading
Commercial Credit Analysis: Debt Covenants
Conditions imposed on facilities extended by banks, also known as covenants (here Debt Covenants) are imposed by bankers upon a borrower to: Preserve the financial strength of the borrower. Maintain the borrowerās ability to refinance itself ā the borrower (being a limited company or a business) continuing as a going concern. Control the assets ā prevent the borrower from selling assets thereby ensuring that assets are not dissipated, Ensure that the borrower does not do something that would be detrimental to the interests of the Bank. Debt covenants, therefore, are from a bankerās perspective extremely important in Ā the structuring of a loan.While a risky, unsound loan will not become good by covenants, they will afford some comfort and a degree of control including providing warning signs should the financial position of the company deteriorate. The amount of covenants that can be imposed on a borrower would depend on: The antecedentsĀ Continue reading
Commercial Credit Analysis: Sources of Repayment
The main concern that a banker has when facilities are extended is on the repayment of the monies advanced. This is the question that he will invariably zero in on and it would be prudent for the prospective borrower to advise him upfront on how he intends to repay the facility. In ideal circumstances there should be more than one source of repayment so that should there be, for some reason, a delay or a problem, the repayment commitment can still be honored. Bankers too, if presented with a well structured plan/ plans of repayment would be more willing to listen and even advance facilities. Primary Source: The primary source of repayment should be directly related to the kind of loan given i.e. for facilities extended (overdraft) for working capital or to finance trade the repayment should be from the proceeds of the goods sold. If a bridge loan priorĀ Continue reading
Introduction to Commercial Credit Analysis
Businessmen need loans for their businessess. There are many instances when the applicant (businessman), unaware of the bankās needs, does not present all the details required or presents it in a manner that causes the Bank to reject the application. At other times, as the information given is incomplete, the applicant is harassed by demands for more information and then after he has submitted that asked for for yet some more. Time drags on while the bedeviled applicant runs hither and thither exasperated, frustrated and harrowed. The banker is also exasperated, frustrated and harrowed. He exists to make loans but before he approves the application and permits disbursal, as a responsible professional, he has to be convinced that the borrower has the capacity and the willingness to repay. Nothing thrills him more than a well presented detailed application that addresses all the concerns that he may have. Credit Management seeksĀ Continue reading