Financing Handbook for Companies: A Practical Guide by A Banking Executive for Companies Seeking Loans & Financings from Banks

By A. Wong

For a company, applying for a credit limit from banks and raising other financings are always of utmost importance. This Book aims at helping the readers to grasp a better understanding of:

1. Different financing alternatives available, so a company can know what financing alternatives it can choose from;
2. Typical features and restrictions of each form of financing;
3. Legal terms commonly used;
4. Actual practices of banks in reality;
5. What a company needs to watch out for, including fees, structure of a credit facility etc. and
6. How financings can have profound implications on a company’s business and financing strategies.

By understanding more clearly features of different forms of financing, as well as the concomitant implications, a company would be in a position to achieve better financial and strategic planning.

The approach used in this Book is very practical, and is written based on the author’s many years of banking experiences, approving credit limit, managing a wide array of company types including multinationals, large corporate, second-tier listed companies, SOEs, SMEs etc., as well as borrowers from diverse industries.

The author is also a Chartered Accountant of England & Wales, and a fellow member of ACCA of UK.

This Book would be useful to CFOs, Heads of Accounting, Heads of Finance, accountants etc. of companies, and bankers.

• Language: English
• Publisher: eBookPartnership.com
• Release date: Sep 30, 2013
• ISBN: 9789881241740

Book preview

FINANCING HANDBOOK

FOR COMPANIES

– A Practical Guide by a Banking Executive for Companies Seeking Loans & Financings from Banks

By A. Wong

Published by The PTI Group (www.the-pti.com)

The PTI Group (PTI) is a consulting, financial services, and e-training group set up by professionals with international working exposure to several countries.

In terms of training, PTI is dedicated to provide practical knowledge regarding developments in the market. We aim at equipping you and your company with the necessary knowledge to grasp the trends and market development, so as to assist you to form foresight to be in a better position to capitalize and benefit from potential business opportunities. Eventually, we hope our readers and course participants would be better able to potentially grow their business, and to outperform their competitors.

Our vision is also to help you increase the chance to succeed in your career, by applying the practical knowledge acquired from our books and courses. Our books/courses aim at preparing you to be in a better position to move up the career ladder to gradually take up a position at a more senior level in the future.

The PTI Group also provides consulting services on a wide array of areas. If you are interested in our services, please email: [e-mail].

© 2013 The PTI Group

All rights reserved.

No part of this book may be reproduced, stored in any retrieval system, transmitted, or used in any form or by any means, electronic, mechanical, photocopying, recording, scanning, digitizing, taping, Web distribution, information systems or network etc. without prior written permission from The PTI Group (‘PTI’). PTI reserves its rights to take legal action for any loss suffered as a result of infringement of copyright of any of our publications, products or services, including but not limited to e-books, and e-training materials etc.

ISBN 978-988-12417-40

Disclaimer

This document is written based on the practical experiences of the author, as well as information and knowledge currently available.

While this book strives to be as accurate as possible, it is noteworthy that some banking practices may evolve over time. It is also important to take note that banking practices, standards and requirements may vary for different banking institutions, and also from country to country.

This document should be considered as reference only, and does not constitute any professional nor legal advice in whatever ways or of whatever kinds. No part of this document represents any advice nor guarantee for obtaining any credit facility in whatever amount &/or of whatever types, whether from banks or from any other financial institutions.

This document should not be relied on as indicating comprehensive nor complete information that a borrower, potential borrower, bank or any staff of a bank etc. would need to consider in granting or borrowing any form of financing from any financial institution. We recommend such professional/person should exercise his/her own judgment, and seek expert &/professional &/legal advice where necessary.

No content of this document should be relied upon solely as the basis for legal protection, or to pursue any legal action whatsoever. In case of doubt, we recommend opinion from lawyer, or other relevant professionals should be sought.

Under no circumstances shall The PTI Group (‘PTI’), parent company, subsidiaries, affiliated companies, shareholders, owners, directors, senior management, officers, employees, other members, agents, suppliers, business partners of PTI will be liable to you for any loss, damages, claims, costs, whatsoever or however arising, including in connection with use of any of PTI’s or any of our business partners’ products, services or websites, and any loss &/or liability arising from any inaccuracy or error, and/or as a result of relying upon any part of the content of this document.

© 2013 The PTI Group

Preface

For a company, it would often be necessary to raise financing from a bank in one way or another, due to money being tied up in stocks or in receivables. Even for large multinational companies which are cash rich, it is also almost inevitably necessary to utilize credit facilities from a bank.

Besides working capital financing, a company may also have longer-term financing requirements, such as financing construction of a new office for business expansion.

As the Bible says Wisdom is the principal thing; therefore get wisdom…… (Proverbs 4:7). In order to choose the right financing option for a company, a company needs to firstly understand what financing alternatives are available, and also need to understand what are the features, common terms as well as what potential obligations/restrictions the company would need to fulfill. In addition, a company also needs to know what to take note of when providing collaterals to banks etc. More importantly, this would put a company in a better position to evaluate impact of different financing decisions on future business strategies.

Besides providing an overview on the different financing alternatives commonly available to companies, terms and conditions commonly used in the legal documents, as well as collaterals that would be acceptable to banks are also discussed in this Book.

The approach used in this Book is very practical, and is written based on my many years of practical experiences working in banks, approving credit limits, managing, and handling a wide array of company types including multinational companies, large corporate, second-tier listed companies, state-owned enterprises, and small and medium enterprises (SMEs) etc., as well as borrowers from diverse industries.

I have tried to use plain language as far as possible in this Book, and it is hoped so that it will be easy for laymen to understand.

This Book would be of use to CFOs, Heads of Accounting, Heads of Finance, and Chief Accountants etc of companies. By mastering knowledge in this Book, it would allow the reader to be able to more effectively raise financing for a company, and to understand the company’s potential obligations as a borrower, and restrictions when borrowing from a bank, so as to be able to better plan the company’s future financing as well as business strategies.

Acknowledgement

I would like to thank my family, my business contacts, and friends who have been supportive to me all along, including during the time when I was writing this Book.

I would also like to thank my Lord for giving me wisdom and persistence to finish this Book.

List of Figures

Figure 1 Basic Terms of a Loan

Figure 2 Inventory Days Formula

Figure 3 Debtors Day or Receivable Settlement Period Formula

Figure 4 Creditors Payment Period Formula

Figure 5 Cash Operating Cycle

Figure 6 Common Shipment Terms

Figure 7 Parties in a Letter of Credit Transaction

Figure 8 Revolving and Non-revolving L/Cs

Figure 9 Place of Presentation under L/C

Figure 10 Letter of Credit Opening Process

Figure 11 Documentary Collection

Figure 12 Financing Alternatives Available for Companies

Figure 13 Financing Alternatives for Exporter

Figure 14 Financing Alternatives for Importers under L/C

Figure 15 Other Working Capital Financings

Figure 16 Cash Flow Statement –Indirect Method

Figure 17 Typical Events of Default

Figure 18 Major Parties in A Syndicated Loan

Figure 19 Rating Scale of Standard & Poor’s

Figure 20 Bond Valuation

Figure 21 Bond Valuation When Coupon is Paid Semi-annually

Figure 22 Dollar Duration of Bond

Figure 23 Convexity for Bond

Figure 24 Conversion Price of a Convertible Bond

Figure 25 Conversion Value of a Convertible Bond

Figure 26 Standby Letter of Credit

Figure 27 Contract Guarantee

Table of Content

Title

Copyright

Disclaimer

Preface

Acknowledgement

List of Figures

CHAPTER 1 INTRODUCTION

1. Introduction

1.1 Background

1.1.1 Details of the Loan

1.1.2 Loan Drawdown

1.1.3 Collateral/ Security

1.1.4 Guarantee

1.1.5. Other Terms

1.2 Financing Requirements of Companies

1.2.1 Inventory Days

1.2.2 Debtors Days

1.2.3 Creditors Payment Period

1.2.4 Cash Operating Cycle

CHAPTER 2 TRADE FINANCE

2. Trade Finance

2.1 Background

2.1.1 Documents for International Trade

2.1.2 Shipment Terms

2.1.3 Other Terms

2.2 Letter of Credit (L/C)

2.2.1 The Parties Involved in a L/C

2.2.2 Key Terms of L/C

2.2.3 Shipping Documents

2.2.4 L/C Opening Process

2.2.5 Discrepancies in Letter of Credit

2.2.6 Advantages and Disadvantages of Letter of Credit

2.2.6.1 Advantages of Letter of Credit

2.2.6.2 Disadvantages of Letter of Credit

2.2.7 Complex Transaction Structures Involving Different L/C Types

2.3 Documentary Collection

CHAPTER 3 SHORT-TERM FINANCING ALTERNATIVES FOR COMPANIES

3. Short-term Financing Alternatives for Companies

3.1 Financing Alternatives For Exporters

3.1.1 Financing Against L/C

3.1.2 Financing Not Against L/C

3.1.3 Financing Provided by Buyer

3.2 Financing For Importers

3.3 Other Working Capital Financings

3.3.1 Factoring

3.3.2 Short-term Revolving Loan

3.3.3 Overdraft (O/D)

CHAPTER 4 TERMS COMMONLY USED IN MEDIUM-TERM & LONG-TERM CREDIT FACILITIES

4. Terms Commonly Used in Medium-term and Long-term Credit Facilities

4.1 Interest Rate Calculation

4.2 Conditions Precedent

4.3 Representation and Warranties

4.4 Covenants

4.4.1 Financial Covenants

4.4.2 Restrictive Covenants / Undertakings

4.4.3 Compliance Certificate

4.4.4 Waiver

4.4.5 Material Adverse Change

4.5 Events of Default

CHAPTER 5 SYNDICATION

5. Syndication

5.1 Major Parties in Syndication

5.2 Structure of Syndicated Loan

5.3 Commitment of a Bank in A Syndicated Loan

5.3.1 Underwriting

5.3.2 Best-effort Basis

5.4 Public or Private Syndication Deal

5.4.1 Syndication Open to the Market

5.4.2 Club Deal

5.5 Conditions Precedent

5.6 Loan Covenants

5.7 Restrictive Covenants / Undertakings

5.8 Events of Default & Cross Default

5.9 Compliance Certificate

5.10 Waiver

5.11 Legal Documentation for Syndication

5.11.1 Information Memorandum

5.11.2 Loan Agreement of Syndicated Loan

5.11.3 Other Documents

5.12 Documents to Be Submitted During the Loan Tenor

CHAPTER 6 BONDS

6. Bonds

6.1 Acronyms for Bonds

6.2 Floating Rate or Fixed Rate

6.2.1 Floating Rate Note

6.2.2 Fixed Rate Bond

6.2.3 Zero Coupon Bond

6.3 Bond Valuation

6.3.1 When Coupon Is Paid Annually

6.3.2 When Coupon is Paid Semi-annually

6.3.3 When Discount Rate Equals Coupon Rate

6.4 Yield to Maturity (YTM)

6.5 Duration

6.5.1 Dollar Duration

6.5.2 Modified Duration

6.6 Convexity

6.7 Time to Maturity

6.8 Convertible Bond

6.8.1 Conversion Price

6.8.2 Price of Convertible Bond

CHAPTER 7 PROJECT FINANCING

7. Project Financing

7.1 Structure of Project Financing Loan

7.2 Covenants

7.3 Financing Acquisition of Property for Leasing

7.4 Financing Construction of Property

CHAPTER 8 PERFORMANCE BOND & STANDBY LETTER OF CREDIT

8. Performance Bond & Standby Letter of Credit

8.1 Contract Guarantee

8.1.1 Tender Guarantee or Bid Bond

8.1.2 Advance Payment Guarantee

8.1.3 Performance Guarantee (P/G)

8.2 SBLC to Support Provision of Credit Facility

CHAPTER 9 HIRE PURCHASE & LEASING