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Topics:What is Financing?
Techniques Of Finance
Types of Financing
8 Important Types Financing How a Bank do Financing ?
Techniques Of Finance
What is Financing?
The act of providing funds for business activities, making purchases or investing. Financial institutions and banks are in the business of financing as they provide capital to businesses, consumers and investors to help them to achieve their goals.
Explanation Of Financing:Financing is basically when you ask a bank (or lender of some sort) for money that you promise to repay. In other words, when you buy a car, if you don't have all the cash for it, the dealer will look for a bank who will finance it for you. Upon approval, the bank will pay the car dealer the money for the car and then they will send you a bill each month. The bank will lend you this money if you agree to pay interest on top of the money lent to you. So, in essence, financing is borrowing money with a promise to repay the money and some additional fee on top of that...
Interest Rates
In a normal economy, interest rates on short-term loans are higher than interest rates on long-term loans. In a recessionary economy, however, interest rates may be low and short-term loan rates may be lower than long-term loan rates.
Back-to-Back Financing
In foreign exchange, two equivalent loans issued by two companies in two countries to offset each other's currency risk. For example, suppose an American company wishes to open a European office and a European company wants to open an American office. The American company may lend the European company $1 million for start-up costs. This loan is calculated in dollars. At the same time, the European company loans the American company the equivalent of $1 million in Euros to help with their start-up costs. Because both loans are made in the local currencies
Debt Financing
Usually in the form of a loan where the principal amount borrowed and interest accumulated on the loan needs to be paid.
PERSONAL LEASE
A personal lease basically means you rent the car for a given period (usually one to five years) and make monthly repayments as you would when you are renting a house. The big difference is that at the end of the agreed rental period, the car may be sold or, in some cases, the finance company may take it back and sell it as a used car. The personal lease is generally used by people who will use their car for private or household use more than 50 per cent of the time, although some tax deductions may be available if the vehicle is also used for business purposes.
HIRE PURCHASE
The hire purchase option is often used by small businesses because of the flexibility it offers. As with a lease you are obligated to buy the car by making a final payment at the end of the agreed hire purchase period. This payment is known as the balloon payment. The hire purchase option gives a business the ability to arrange the deal in such a way that the monthly repayments are suitable for the businesss cash-flow and budget by increasing the size of the deposit or balloon payment, the monthly payments can be made smaller. This is handy for businesses that are starting up and have a lot of different calls on their cash-flow. some tax deductions may be available for depreciation and interest charges.
OPERATING LEASE
This is the best option for the business that runs its vehicles hard and turns them over frequently, such as a company with sales representatives or delivery vehicles that are constantly on the road. Under an operating lease, the financing company retains ownership of the vehicle and provides the customer with exclusive use of the vehicle for one to five years in return for lease rental payments just like a long-term hire car. Importantly, the user does not have to worry about the residual value at the end of the lease and the finance company bears the risk of losing money on the resale of the vehicle. Operating leases will not show up as assets on the balance sheet, so vehicle borrowing costs will not affect gearing levels. In addition, lease payments are fully tax-deductible, except for luxury vehicles.
CHATTEL MORTGAGE
This financing option suits businesses that account for their operations on a cash basis. It works the same as a hire purchase agreement: the customer makes a series of monthly payments, then a final balloon payment. It also offers a great deal of flexibility, because the buyer is able to set the length of the lease payment and adjust the monthly repayments by increasing or decreasing the amount paid as a deposit or balloon payment. Under a hire purchase agreement, businesses are allowed to claim back some or all of the GST contained in the price of the vehicle. But where a business that uses an accrual accounting system can claim the GST back in one Business Activity Statement, businesses that use a cash accounting system must claim the GST over the full term of the finance contract.
OTHER OPTIONS
Financing companies have expanded their product offerings in the past few years, and many of the European marques including Volkswagen, DaimlerChrysler and BMW follow the example set by their parent companies, which often offer customers a complete range of banking and financial services products. In Australia, automotive financing companies offer products including insurance, fleet management, maintenance, fuel cards and even credit cards.
1. Take-Out Financing
Banks usually lend for short-term. It is because their source of funds for financing comes from deposits which are usually for a maximum period of 3 to 5 years. However, presently banks are encouraged to provide finance for longterm projects like infrastructure industry. Hence when a bank, say, lend for 10 years against a 4 years deposit, there is a problem of continuing the loan after 4 years. It is possible that the bank will continue to get deposits every year. Yet, the fact today is a 10-year loan has been made based on a 4- year deposit which is a risky affair. In such a situation, few banks will come together and under an agreement each one of them will take up the loan portfolio in turn, for a fixed period of time till the loan matures.
For example:If Bank A has provided a 10 year loan, with an arrangement with Bank B and Bank C whereby, after the end of the 4th year, Bank B will finance the loan for next 3 years and Bank C will finance the loan during the last 3 years. Illustratively, the financial arrangement works as follows: Bank Period of loan financing Bank B and C have done take out financing. This system of financing takes care of banks' asset-liability mismatch; long-term projects can be financed by Commercial Banks; funds can be ensured for nationally important projects like infrastructure industries.
4. Syndicated Loan
It is a loan facility provided to a single borrower by a group of banks. As the loan is extended by a group of lenders, the size of syndicated loan is normally large and a single lender/ banker may not have been in a position to extend such a facility. It could also be that a single lender may not like to have such a large exposure (credit risk) to a single borrower. Syndicated loans are arranged to finance projects needing large sums of money where the credit risk is also high. These loans are for financing medium to long-term requirements. Since, the bankers involved in providing such loan facility are many; usually co-ordination work is done by a 'lead manager' who acts as an intermediary between the lenders and the borrower.
5.Bridge Loan
Bridge loan is a short-term temporary loan extended by financial institutions to help the borrower to meet the immediate expenditure pending disposal of requests for long- term funds or regular loans. For example, when a borrower's application for project finance is pending for final sanction, the bank may extend a bridge loan to the borrower to meet urgent expenses. Usually, a bridge loan gets repaid out of the main loan when sanctioned. During 1980's corporate used to avail of bridge loans from banks against the expected subscription on public issue of debentures, equity, etc. Here, the bridge loan is not against any main loan arrangement but against anticipated cash flow. Again, if an individual is negotiating the sale of his asset, say a house, a bridge loan may be extended by a bank to meet the seller's immediate cash requirements. The loan will be paid off when the borrower realizes his sale proceeds. Bridge loan is relatively risky for the bankers when repayment depends upon an external factor not under the control of lenders.
6. Consortium Finance
Under consortium finance a large credit facility may be jointly arranged by a combination of several banks. Usually, one of the banks in the group will act as the leader for the credit. The consortium leader will extend a larger share of the credit as compared to other banks in the consortium. The word consortium here refers to 'a combination of many banks who have agreed to extend the credit facility'. The share of credit agreed to be extended will be decided by the banks in the beginning. The borrower need not deal separately with all the banks in the group. Usually, he deals with the consortium leader who takes care of other banks' credit. In India till two years back, as per RBI guidelines, large credit facility, say Rs.10 crore and above, should be granted only under consortium arrangement.
7.Preferred Financing
In the highly competitive world of banking today, banks are
reaching out to customers, particularly high net worth or wealthy customers. One area of lucrative finance for bankers is consumer finance, more particularly car finance. A preferred financier is a lender or a bank, which provides large consumer loans like car loan under an arrangement with the car manufacturer. Because of the tie-up, the manufacturer agrees to provide some concession in the car price and some additional facilities in the car. Thus, the manufacturer makes available for two reasons. One, purchase price is assured and second it gives some push for the demand of that car. Preferred Financier also benefits. He gets wealthy customers. Default in the consumer finance sector is minimum because most of the customers have regular income.
Do you ever wonder why long-term investments, like CDs and money market accounts, provide higher interest rates than checking or traditional savings accounts? Perhaps you have questioned the minimum balance you are required to maintain. The truth is, your money earns your bank money, too. The money you deposit into an account is what funds the various loans banks offer. From mortgages to personal loans, the bank essentially borrows money from your account, lends it to someone else, collects interest on it and then returns it to you. Of course, your actual balance never changes unless you make a deposit or withdrawal, but your money is always being put to use.
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If you want to make a withdrawal from your checking account, the bank must provide it to you right then (hence the common term, demand account. This means that the bank must maintain enough cash on hand for customers to access their account funds at any time. On the other hand, when you commit to an investment period of several months or years, the bank can loan money out without you needing it for a while. You are usually rewarded for helping the bank earn more money from interest payments by receiving a higher interest rate yourself. How does a bank profit from interest they collect when they pay you interest too? Consider this: Your money market accountof $50,000 with a 1.25% APY earned you an extra $625 this year. Thats great. Your bank loaned out your $50,000 for part of a home loan, plus much more from other depositors, and collected several thousand dollars in interest payments. Thats great for your bank as well.
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Let's say you put $1,000 in the bank. A smaller bank must keep 3% in reserve, amounting to $30. That means that the bank can lend out $970 -- and earn interest on that money. The loan is used to buy something, and the seller can put that money into the bank. Out of that money, the bank can lend out all but 3%, so it's possible for the bank to lend out $940.90. However, that money isn't new. It is, conceivably, still money from your original deposit. Banks use your money over and over again, in order to keep the economy moving, as well as to continuing making its own money.
BANK OCCUPATIONS
Tellers Platform Bankers (SAP) Mortgage Lenders Operations Manager Branch Manager
Types of Services
Bank Cards
Automated Services
Bank cards that allow for the payment of goods and services to be subtracted directly from a bank deposit account.
Bank cards with preset, limited value. Used to pay for goods and services. Alternative to cash.
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Bank by Phone
ATM