BANKING FINANCE

KAIVAN KANKARIYA: 000358092

SHAILJA BHATT: 000358089

ARPIT MALIK: 000357180

AMANDEEP SINGH CHEEMA: 000358037

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Table Of Content

Introduction

Key Elements

Types Of Bank Financing

Short term Bank Financing

Medium term Bank Financing

Long term Bank Financing

Conclusion

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What is Banking finance?

Banking refers to that process in which a bank which is a

commercial or government institution offers financial services to their

customers

that includes lending money , industrial loan, project finance, issue

of currencies ,transaction processing etc.

The financial institutions are controlled and supervised by the rules

and regulations delineated by government authorities.

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What do bank look for?

Banks look for fundamentals at all tags , including:

• Strong Management the bank finance

• Valuation is important and key factor for financing

• Initial Investment of the company

• Competitive Advantage (Barriers to Entry)

• Well Defined Use of Proceeds

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• Key Elements of a bank finance

• Clear, concise, quantitative calculation of project

• Use of requested funds ? all expenditures related to the

proposed

investment

• Historic (3 years back) free cash flow available

• Projected (3 years forward) free cash flow available

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Financial statements, tax returns,

disclosures

Demonstrated ability to comply with key

loan terms

Track Record

• Achievable ROI (Profitability)

• Growth Potential (Scalability)

• Strong Financial Accounting

• Valuation

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The 5 C’s of Credit

1. Character : refers to the borrowers reputation

2. Capacity : measures a borrowers ability to repay a loan by comparing income

against recurring debts

3.Capital :a lender will consider any capital the borrower puts towards a potential

investment because a large contribution by the borrower will lessen the chance of

default

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4.Collateral :property or large assets helps to secure the loan

5.Conditions : interest rate and amount of principle will influence the

lenders desire to finance

the borrower

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Types of Bank Financing

Short term Long term

medium term

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Short- Term FinancingIt is that form of financing which embraces borrowings or lending of funds for a

short period of time. It relates to the finance obtained on short-term basisusually for one year or less than one year. It is also known as working capital i.E.

The excess of current assets over current liabilities. Short- term financing is

assured for financing the current assets like inventories.

Most of the enterprises use this tool as a source of financing. Its practice is more

in developed countries like U.S.A. Even large scale companies makes use of

short term finance.

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Sources Of Short Term Financing

Trade Creditors

Customers Advances

Commercial Banks

Government Institutions

Personal Loan Companies

Finance Companies

Money Lender

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Advantages of Short Term

Financing

Easier to obtain

Flexibility

Convenience

Tax savings

Extension of credit

Lower cost

Availability

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Disadvantages of Short Term Financing

Frequent maturity

High cost

Not used for large projects.

Usually limited in size.

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Purpose of Short Term Financing

Start-up cost

Short term operational cost

Emergency repairs and maintenance

Cash flow

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Medium term financing

Medium term financing use to support capital goods, services,

equipment such as air craft, motors, tools, transport materials , oil

and gas production equipment ,consultancy etc. Which includes transactions from $50,000 to millions.

Generally structured for repayment periods up to 7 years.

The risk components in medium term financing are the same as in

shorter term transaction .

Longer the period of financing higher the probability of risk to the

lender.

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Forms of medium term lending:

Import credits It provides finance for Export sales

Direct Loans Negotiated between lender and

foreign importer on an individual

basis

Loan agreements and it’s

components

Components: Identify borrower,

loan amount and expenses,

event of default, security ,

jurisdiction

Line of credit allocation To avoid lengthy and costly

negotiations

Supplier credits It includes extended terms of

credit to the buyers

Import credits and Direct Loans Northstar Trade finance

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Forfaiting :

It is a method of trade finance that allows exporters to obtain cash by

selling their medium and long – term foreign accounts receivable at a

discount on a “without resource” basis, that means forfaiter assumes and

accepts the risk of non payment.

Debt is usually evidenced by Bills of Exchange, Promissory Notes or a Letter

of Credit, stand by L/C.

Interest rates can be agreed on a fixed rate, although it can also be

arranged on a floating interest-rate bearing basis.

Used for larger transactions covered by series of promissory notes maturing semi annually for 2-5 years , sometimes only one year.

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Forfaiting: Pros and Cons

Advantage: ( to exporter )

As the transactions are without resource, fully eliminating political, transfer

and commercial risk of the importer.

Gives the ability to the exporter to provide longer payment terms and

receive the proceeds cash.

100% financing possibility.

Protects the exporter from future interest rate increases or exchange rate

fluctuations.

Importer receives additional credit through forfaiting from the exporter.

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Advantage: ( to bank )

Maximum use of credit lines, not directly used credit lines can be utilized in

the forfaiting market.

Ease and Simplicity of Documentation; simple and quite uniform documentation which eliminates legal costs each time and makes fast

bookings possible.

Liquid assets; in case of need the credit lines can be freed in a short term.

Attractive Yield; trade related assets have better returns than syndicated

loans

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Disadvantage :

Cost is often higher than commercial lender financing

Difficult to arrange for medium size business.

Not readily available to small businesses.

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Export Credit Agency :

They are traditionally viewed as lenders of last resort, though roles and

mandates are evolving and supporting exporters in their home countries

that could not obtain financing from other commercial sources

Currently no single model or approach to lending across ECA

Some continue to be direct lenders with no private sector involvement

while others will provide guarantee to banks or other financial institutions

that provide the actual funding.

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International Leasing:

This form of financing keeps the ownership of the goods with the lender,

while the use of goods is transferred to the borrower.

Leases Fall into two classes:

1. Operating : A true rental agreement where the lessor holds and

maintains assets for the short term use of lessees.

2. Financial : It simply acts as a lender, providing up to 100% financing for

the asset the borrower is acquiring.

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Project Financing:

It is a specialized form of lending and is tailored to unique circumstances.

It is an arrangement whereby the lenders secure their loan by using the

cash flow and collateral provided by the project.

Initial security is combination of undertakings and guarantees by the

project sponsors, which provide the lenders with a satisfactory credit risk.

Project financing is generally employed for larger capital projects involving

substantial risk.

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Long Term Financing

The repayment period of long term financing can be 15-20 years .

It’s duration is to long as compared to short term financing and

medium term financing. These kind of financing usually provide by banks, financial institutions and export credit agencies in support of

large projects.

Long term financing is often used to support export and import of

goods and services. Long term financing provide by banks ,

financial institutions and export credit agencies directly or

collaborate.

Quite the long term financing funded by banks ,it may partially guaranteed by ECA.

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Long Term Financing

Generally ,long term financing used to purchase long term assets

like machinery, land ,building, transportation and services like

engineering

services consulting services and so on. For purchasing such kind of

assets banks provide fund to the corporations. It is very helpful for

companies because it is not an easy for any company to invest the

huge amount in these assets but without these assets the business

cannot commence.

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Sources Of Long Term Finance

Shares

Ventures capital

Government grants

Mortgage

Bank loan

Retained profit

Owner’s capital

Selling assets

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Advantage Of Long Term Financing

Debt is a least costly source of long term financing. It is least costly

because..

Interest on debt is tax deductible

Debt financing provides sufficient flexibility in the financial structure

of the company

Bondholders are the creditors and have no interference in business

operations because they are not entitled to vote

The company can enjoy tax saving on interest on debt

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Disadvantage Of Long Term

Financing

Interest on debt is permanent burden on the company. Company

has to pay fix rate of interest to the creditors whether it is earning

profit or not.

Debt has a fixed maturity date .Therefore ,the financial officer must

make provision for repayment

Debt is the most risky source of finance because company has to

pay interest and principal on time.

Only large scale ,creditworthy whose assets are good for collateral

can raise long term finance.

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Purpose Of Long Term Financing

To finance fixed assets

To finance the permanent part of working capital

Expansion of companies

Increasing facilities

Construction projects on big scale

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Executive Summary

Chinese companies face domestic competition and slow growth in

the developed world. Chinese companies are exploring new

markets and acquiring advanced technology. There is a great increase in Chinese development when Europe outbound

investment. European companies have been selling non core assets

as China is always the largest export destination for Brazil , Chile and

Peru. Energy companies in China has been used as a significant

investor for bringing financial strength.

In a nutshell, we can’t imagine market entry on international level

without the help of bank financing because it requires lot of

investment. So, we can say bank financing plays an imperative role in every kind of business

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Relation With Topic In this article, we find that the funding power of banks aid the

business activities to a great extent .Chinese development banks aid the Chinese corporations to expand their business internationally

that is why Chinese companies capturing various sectors in the

distinct countries.

If we compare the Chinese investors and brazil’s then we find that

Chinese invest $28billion in Brazil while brazil invest only $300 in

China . Bank financing is the back bone for any kind of business, it's

importance even incline more on international level.

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