Lending Institution Options PDF by Steve Bang

Chapter 10 Lending Institution Options Planning to Borrow by Steve Bang  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Chartered Banks and Trust Companies  Act as intermediaries: borrow from depositors and lend to borrowers  Must ret...

Chapter 10 Lending Institution Options Planning to Borrow by Steve Bang  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Chartered Banks and Trust Companies  Act as intermediaries: borrow from depositors and lend to borrowers  Must retain a portion of the money deposited (capital adequacy)  Shareholders demand that banks make a good return  Overhead impacts spread, representing 2% of the loan  Delinquency and non-performing loans are part of overhead 10-2  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Banks make money on Spread Spread Calculation Interest received from the loan = 5% Less: Interest paid on the deposit = 1% Less: Overhead cost = 2% Spread on loan = 2% 10-3  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing from Banks Advantages  Speed of transaction  Product variety  Superior pricing Disadvantages  Banks are conservative lenders 10-4  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing from Credit Unions Advantages  Lower rates  Easier approvals Disadvantages  Reduced lending options  Slower loan decisioning  Match funding  Geographical barriers 10-5  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing from Insurance Companies Advantages  Lower rates  Consistency (no securitization) Disadvantages  Slower loan decisioning  Reduced lending options 10-6  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing from Investment Companies Advantages  Mortgage rate sales Disadvantages  Securitization  Limited product offering  Slower loan decisioning and higher penalties 10-7  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing Advantages from Credit Card Companies Global access Interest-free period Special features Quick and easy approval No collateral required Borrowing limits are easy to increase Disadvantages High interest rates Some service charges may apply Interest-free grace period 10-8  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Categories of Credit Dard Customers Credit Builders – Use credit cards to establish a credit history Transactors – Pay balance off every month Revolvers – Carry balances from month to month Dormant Cardholders – Don’t use their card 10-9  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing from Finance Companies Advantages  Easier approval process  Easing cash flow for small/medium retailers Disadvantages  Higher interest rates  Negative impact on credit history  Fewer product choices  Large penalties 10-10  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing from Private Money Lenders Advantages  Easier approval process  Flexible repayment options  Equity lending options  Most properties qualify Disadvantages  Higher interest rates  No guarantee of renewal when term ends  Limited features and large penalties  Finder’s fees and other charges 10-11  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing from Payday Loan Companies Advantages  Instant access to funds  No lengthy credit investigation and no collateral Disadvantages  Very high cost  Downward spiral 10-12  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing from Fintech Lenders (Financial Technology) Advantages  Quick and easy application process  Wide range of products  Fast approval process  Rapid receipt of funds Disadvantages  Not easy to determine who the lender is  Fixed and often high pricing  Additional fees and penalties 10-13  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Crowdfunding and Crowdlending Advantages  No Repayment or Collateral Required  Easy Access to multiple potential donors/lenders  Minimal Regulation Disadvantages  Fees and Charges  Equity Sharing 10-14  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing from Pawnbrokers Advantages  Instant access to small sum of money  No lengthy investigation process  No impact on credit history Disadvantages  Very short term  Discounted value  High cost  No guarantee the item will be returned 10-15  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Borrowing from Loan Sharks Avoid at all costs 10-16  Chapter Lending Institution 10 Options Planning to Borrow by Steve Bang Planning Which Lending Institution to Use 1. Know the penalty. 2. Know who you are borrowing from. 3. Private loans can be short term. 4. Avoid payday loan companies if possible. 5. Avoid Loan Sharks. 10-17  Unique Loan-Related Products Chapter 11 and Lending Solutions Planning to Borrow by Steve Bang  Chapter Unique Loan-Related 11 Products and Lending Planning toSolutions Borrow by Steve Bang Leasing versus Buying a Car Leasing  Good for low-distance users  Tax advantages of leasing  Easy application process  New car every few years  Additional fees and charges Buying  Good for high-distance users  Lower interest rates  No tax advantage 11–2  Chapter Unique Loan-Related 11 Products and Lending Planning toSolutions Borrow by Steve Bang Dealer Financing versus Borrowing from a Lending Institution Advantages of Dealer Financing  One-stop shopping  Rate sales  Easier approval process Disadvantages of Dealer Financing  Higher vehicle cost  Reduced flexibility  Increased penalties 11–3  Chapter Unique Loan-Related 11 Products and Lending Planning toSolutions Borrow by Steve Bang Tax Advantages of Borrowing  Borrowing to invest in marketable securities  Borrowing to purchase rental property  Borrowing to invest in a business 11–4  Chapter Unique Loan-Related 11 Products and Lending Planning toSolutions Borrow by Steve Bang Unique Sources of Borrowed Funds  Margin accounts  Government-funded student loans  Letter of Credit  Borrowing from your Insurance Policy  Borrowing from your employer  Borrowing from your RRSP by using the Home Buyer’s Plan  The all-in-one account 11–5  Chapter Unique Loan-Related 11 Products and Lending Planning toSolutions Borrow by Steve Bang Reverse Mortgages Using equity to fund retirement Options available Benefits 11–6  Chapter Unique Loan-Related 11 Products and Lending Planning toSolutions Borrow by Steve Bang Credit Insurance Product Options: Life, disability, critical illness, job loss Provider Options Lending institutions, insurance companies 11–7  Chapter Unique Loan-Related 11 Products and Lending Planning toSolutions Borrow by Steve Bang Planning the Use of Unique Lending Solutions 1. Buying a vehicle is usually the best option. 2. Zero percent financing is not always a good deal. 3. Beware of leveraged investments. 4. Rental properties can be great investments. 5. Use an insurance policy as an emergency fund. 6. Use your RRSP to save for your first home. 7. Insure your debt, but shop around. 11–8 Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang A Big Contract for Chris Chris and Jennie’s Debt Servicing Combined GDSR = = 14.9% Combined TDSR = = 37.1% 12-2  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang A Big Contract for Chris Approval Recommendation The business should be approved for a $50,000 operating line of credit, subject to the following conditions: Register a $50,000 mortgage against the house owned by Jennie (the new “loan-to-value” would be 57.1% (= [$247,000 (current mortgage) + $50,000 (new)] ÷ $520,000) Independent legal advice (I.L.A.) for Jennie $50,000 personal guarantee from Chris $50,000 personal guarantee from Jennie General security agreement (GSA) over the Flowing Water’s Plumbing 12-3  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang Company Structure 1. Sole Proprietorship 2. Partnership 3. Incorporated Company 12-4  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang Verifying the Income Generated by a Small Business Sole Proprietorship and Partnership  Personal tax returns Incorporated Company  Company tax returns  Notice to reader financial statements  Review engagement financial statements  Audited financial statements 12-5  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang Debt Servicing Ability of a Company  A company’s debt servicing ability is based on the company’s profit.  Lending institutions follow specific steps to determine a company’s ability to service the debt. 12-6  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang Determining Debt Servicing Ability of a Company Lending institutions follow these steps to determine a company’s ability to service the debt: 1.Take a 3-year average of the after-tax profit of the company. 2.If the owners issue dividends to themselves from the profit, determine what portion of those dividends is required to service the owner’s personal debt (obtain a Personal Net Worth statement from the owners). 3.If the remaining profit is enough to cover the principal and interest payments on the loan, then the company is able to service the debt. 4.Ensure the debt-to-equity ratio is in line with the industry average. 12-7  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang Investigating a Company’s Credit History  Company’s credit bureau report  Dun and Bradstreet Report  Bank Statements  Bank Rating 12-8  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang Lending to a New Business Lending institutions will lend money to new and/or as yet unopened businesses based on one or more of the following:  A detailed and comprehensive business and marketing plan  Financial strength of the business owner  Personal assets of the business owner that are available to be pledged as security  Guarantees from municipal, provincial, or federal governments (e.g., the Canadian Small Business Financing Program) 12-9  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang Common Business Loan Collateral Requirements 1. Chattel Mortgage 2. General Security Agreement 3. Guarantee 4. Independent Legal Advice 12-10  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang Common Business Loan Product Options 1. Operating Line of Credit 2. Demand Loan 3. Commercial Mortgage 4. Commercial Letter of Credit 12-11  Chapter 12 Small Business Lending to Self-Employed Individuals Planning to Borrow by Steve Bang Planning for Small Business Lending 1. Structure your company appropriately. 2. Communication is key, making I.L.A. easy. 3. Keep the company’s credit bureau report clean. 4. Is the loan the right choice for the business? 12-12 Chapter 13 Recovering the Borrowed Funds Planning to Borrow by Steve Bang  Chapter Recovering the Borrowed 13 Funds Planning to Borrow by Steve Bang The Case of the Missing Sailboat How will you find Jim and the sailboat?  Attempt to contact Jim by phone or e-mail.  Contact Jim’s last known employer.  Contact Jim’s relatives.  Talk to Jim’s neighbours.  Use the Internet and social media.  Review Jim’s bank account.  Update Jim’s credit bureau report.  Visit the Port Credit Marina.  Contact U.S. Customs.  Review Jim’s hobbies and interests.  Review Jim’s credit card transactions. 13-2  Chapter Recovering the Borrowed 13 Funds Planning to Borrow by Steve Bang Why do borrowing customers fail to repay the loan? 1. They forgot to make the payment, or there was an error with the payment set-up. 2. They are unable to make the payment due to lack of funds. 3. They have no intention of repaying the debt and attempt to hide from the lending institution. 4. Credit fraud. 13-3  Chapter Recovering the Borrowed 13 Funds Planning to Borrow by Steve Bang Common Collection Terminology  Delinquency  Repossession  Eviction  Non-performing Loan  Write-off  Recovery 13-4  Chapter Recovering the Borrowed 13 Funds Planning to Borrow by Steve Bang The Collection Process 1. Contacting the borrower 2. Possible recovery options 3. Realizing on the security (collateral) 4. What happens when the collateral is insufficient? 13-5  Chapter Recovering the Borrowed 13 Funds Planning to Borrow by Steve Bang Planning for Avoiding Collection Problems  Information is key  Encourage borrowing customers to seek help when needed  Always employ prudent lending practices  Proper collateral registration 13-6