CHAPTER 5: LENDING TO BUSINESS

FIRMS AND PRICING BUSINESS LOANS

Chapter 5: Lending to business firms and pricing business loans 1

 Key Topics
1 • Types of Business Loans: Short-Term
and Long-Term

2 • Analyzing Business Loan Requests

3 • Collateral and Contingent Liabilities

4 • Customer Profitability Analysis

5 • Pricing Business Loans

Chapter 5: Lending to business firms and pricing business loans 2

 A Big Picture

Chapter 5: Lending to business firms and pricing business loans 3

 Types of Business Loans
Business
Loans

Short- Long-
term term
Chapter 5: Lending to business firms and pricing business loans 4
 Self-
liquidating
inventory
loans

Working
capital loans

Interim
construction
financing

Security
dealer
financing

Retailer and
equipment
Chapter 5: Lending to business firms and pricing business loans

financing

Asset-based
loans
Short-term Business Loans
Short-term Business Loans

Syndicated
5

loans
 Self-Liquidating Inventory Loans
• Used to finance the purchase of inventory
• Take advantage of the normal cash cycle
inside a business firm
• Peak seasons !
• <90 days

Chapter 5: Lending to business firms and pricing business loans 6

 Working Capital Loans
- The money available to operate
the immediate and short-term
needs of your company

- Provide businesses with short-

run credit
- Duration is from a few days to
about one year

- Account receivable
- Inventories
Chapter 5: Lending to business firms and pricing business loans 7
 Cash Conversion Cycle (CCC)
• Vinamilk collects its receivables on average
every 35 days
• Its inventory turnover is every 45 days,
• it pays suppliers on average every 32 days.
• Its cash conversion cycle is 48 days.
• If its annual sales were $6 million with a
40% gross profit generated, then they would
need a working capital of $473,425.
• Assuming $200,000 in non-financed
working capital already exists, a reasonable
line of credit request would be $273,425.
[Annual sales x Cost of goods sold x CCC]
Working capital required =
𝟑𝟔𝟓 𝒅𝒂𝒚𝒔
Chapter 5: Lending to business firms and pricing business loans 8
DBS Working Capital Loans

Chapter 5: Lending to business firms and pricing business loans 9

 DBS Working Capital Loans
• What are the benefits
1 of SME working capital
loans?

• What are the

2 requirements of SME
working capital loans?

Chapter 5: Lending to business firms and pricing business loans 10

Working Capital Loans in Vietnam

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 Interim Construction Financing
• Support the construction of homes, apartments, office
buildings, shopping centers, and other permanent structures.
• Although the structures involved are permanent, the loans
themselves are temporary.
• They provide builders with funds needed to hire workers, rent
or lease construction equipment, purchase building materials,
and develop land

Chapter 5: Lending to business firms and pricing business loans 12

Interim Construction Financing

Chapter 5: Lending to business firms and pricing business loans 13

Security Dealer Financing
- Support short-term financing to
trade securities

- Duration is from overnight to a few

days
- Holdings of government securities
- Hight quality corporate bonds
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Security Dealer Financing

Chapter 5: Lending to business firms and pricing business loans 15

Retailer & Equipment Financing
- Support installment purchases of automobiles, home
appliances, furniture, business equipment, and other
durable goods through floor planning method.

- 90-day terms initially

- May be renewed for one or more 30-day periods

- A lien against the goods in the event of non-payment

- Account receivables
Chapter 5: Lending to business firms and pricing business loans 16
 Asset-based / Factoring loans
• Credit secured by the
shorter-term assets of a
firm that are expected to
roll over into cash in the
future.
• Particularly accounts
receivable and
inventory
Chapter 5: Lending to business firms and pricing business loans 17
Syndicated Loans (SNCs)
- A loan or line of credit extended to a
business firm by a group of lenders .
- Reduced credit risks for each lender
- Earn facility fee income
- “drawn” syndicated loans
- “undrawn” syndicated loans
Chapter 5: Lending to business firms and pricing business loans 18
VIETIN BANK TO SIGN $139 MILLION SYNDICATED LOAN
AGREEMENT WITH 5 MAJOR TAIWANESE BANKS

Chapter 5: Lending to business firms and pricing business loans 19

EVN-NPC SIGNED A SYNDICATED LOAN
AGREEMENT WORTH VND 515 BILLION

Chapter 5: Lending to business firms and pricing business loans 20

 Term Business Loans
• Fund longer-term business investments,
such as the purchase of equipment or the
Definition construction of physical facilities, covering
a period longer than one year

Collateral • Fixed assets

Interest and • A fixed or a floating interest rate

repayment • Monthly or quarterly installments.

Chapter 5: Lending to business firms and pricing business loans 21

Overview of Long-term Loans in Vietnam, 2016

Chapter 5: Lending to business firms and pricing business loans 22

 Important Factors On Business Application
qualifications of the borrowing firm’s management

the quality of its accounting and auditing systems,

conscientiously files periodic financial statements

adequate insurance coverage will be secured

excessively exposed to the risk of changing technology

length of time before a proposed project will generate positive cash flow

trends in market demand

Chapter 5: Lending to business firms and pricing business loans 23

 Revolving Credit Finance
• Allows a customer to borrow up to a pre-specified limit, repay all
or a portion of the borrowing, and re-borrow as necessary until the
credit line matures
• Loan commitment fee:
– Formal loan commitment: is a contractual promise by a bank to lend to a
customer up to a maximum amount of money at a set interest rate (or
rate mark up over prime or LIBOR). The only way the bank can renege on
its promise is if there has been a "material adverse change" in the
borrower's financial condition.
– Confirmed commitment line: indicates banks’ approval, though the price of
a credit line not be set
Chapter 5: Lending to business firms and pricing business loans 24
 Project Loans
• Credit to finance the
construction of fixed
assets designed to
generate a flow of
revenue in future
periods
• The most risky !!

Chapter 5: Lending to business firms and pricing business loans 25

LENDING TO SUPPORT REAL-ESTATE
PROJECTS IN VIETNAM, 2017

Chapter 5: Lending to business firms and pricing business loans 26

 Properties Of Long-term Project Loans
May be
Laws and
delayed by
regulations
weather

Large Interest
amounts of Long- rates may
funds term change
project
loans
Chapter 5: Lending to business firms and pricing business loans 27
 M&A Loans

- Finance for mergers and acquisitions.

- The purchase of a publicly traded company

by a small group of investors
- They often borrow very heavily to finance
the purchase of the stock of the company
Chapter 5: Lending to business firms and pricing business loans 28
Leveraged Buyout Loans in Europe

Chapter 5: Lending to business firms and pricing business loans 29

THANKS FOR WATCHING

Chapter 5: Lending to business firms and pricing business

30
loans