Credit and Lending Decisions

Question: Discuss about theCredit and Lending Decisions. Answer: Introduction A clients accounts receivable primarily entails invoices paid in a period of 30-60 days; lenders use them as assets for securing bank loan financing. In order to subject ones receivables as collateral, the first consideration is that they must be of quality. Factoring of invoices is a practice that allows one to get financing secured by accounts receivable. A client of a financial institution will get financing through the sale of accounts receivables to the bank done through the exchange of an immediate payment. The sale should be done in two instalment payments. The first one covers close to 75% of the value of the A/R and should be deposited in the clients bank account while the customer presents the invoices for financing. The remainder should be deposited once the client is required to pay the full invoices. A client that relies on factoring of invoices should be provided with dependable cash flow; one that would be used in fund most of the operations and the clientele investment growth. Since the factoring line is tied to the clients receivable, the bank encourages their growth following the increase in the clients income generating activities[1]. The second option that allows a customer of the bank to finance their accounts receivable is to have a line of credit. This line of credit provides the client with the necessary funding up to the present amount. This means that the client of the bank can be allowed to draw the funds up a certain determined limit.[2] The same client will then pay as set by the bank while the clients cash improves. Even if some lines of credit can sometimes be secured solely by accounts receivable, they may require additional collateral since the value of the AR can change regularly and could fall below the credit limit.[3] The value of inventory as collateral can be used by banks can be adopted in instances where inventory financing is a short term loan given to an individual client or business entity for its personal/business operations and expenditure. The products (in this case, inventory) should serve as collateral for the applied loan just in case the business fails to sell its products and cannot be able to facilitate the loan. Inventory financing would thus be useful for individual clients or business entities that should make a payment for their suppliers in a shorter period of time than it requires them to sell similar inventory to clients. It will also offer a solution to frequented seasonal fluctuations in terms of cash flows, meant to empower a business to attain a higher sales volume. When a bank demands from a client to give collateral for a specified secured loan, what the bank is essential doing is minimizing the involved risks of extending credit to others similar clients who may be in need of other loans.[4] As a way of guaranteeing that a certain collateral would offer proper security, the bank in question would seek to match the kind of customers collateral with the amount of loan being given to the same client. For instance, the productive life of the same collateral should exceed and meet the term specified for the loan. If this is not case, then the lending banks secured interest would face instability. Resultantly, short term assets including receivables and other inventory will not be accepted by the bank as security for any short-term loan; except that they are proper and acceptable for shorter-term financing and lending including the line of credit.[5] The lending bank may require that its claim to the involved collateral be named the first secured interest. This means that the no superior or prior liens would be made available or created against the same collateral. If the customer is perceived to be the lien holder, the lending bank will ensure that its share of the foreclosure first proceeds before any instance of a claimant being entitled to any money. Sometimes a creditor of the bank may want to have a priority claim against the collateral being provided to secure the loan. In this case, the client borrowing money will be forced to search the public records in order to ensure that prior claims have not been earlier filed against the collateral being offered. In the case provided, the business in question has recorded high inventory turnover rates, and the business needs restocking inventory in order to benefit from another sales cycle[6]. Bibliography Beccalli, Elena, and Federica Poli.Lending, Investments and the Financial Crisis. Houndmills, Basingstoke, Hampshire ; New York, NY : Palgrave Macmillan, 2015. Fiordelisi, Franco, Philip Molyneux, and Daniele Previati.New Issues in Financial and Credit Markets. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan, 2010. Murinde, Victor.Accounting, Banking and Corporate Financial Management in Emerging Economies. Amsterdam: Elsevier JAI, 2007. Retsinas, Nicolas Paul, and Eric S. Belsky.Moving Forward: The Future of Consumer Credit and Mortgage Finance. Cambridge, Mass: Joint Center for Housing Studies, Harvard University, 2011. Sathye, M. M., James Bartle, and Raymond Boffey.Credit Analysis and Lending Management. Prahan, Vic: Tilde University Press, 2013. Saunders, Anthony.Financial Institutions, in and Out of Crisis: Reflections by Anthony Saunders. Hackensack, NJ: World Scientific Pub, 2012.