Secured Bank Loan: Secured bank loan can be define as
“a loan which is obtained by pledging some specific assets as a
security/collateral.
Short Term Secured Bank Loan: The bank loan obtained by pledging
assets, specially current assets i.e. accounts receivables and inventories as a
collateral. The credit which is extended by the commercial bank to the business
firms, having maturity of one year or less than one year by pledging the
specific assets of borrower as a collateral.
Features Of Short Term Secured Bank
Loan: Following are
the some important features of short term secured loan;
1) Collateral:
The assets on which bank has claim at the time of liquidation or borrower defaults
on maturity.
2) Cost/Interest Rate: The cost of secured loan is higher then the cost of unsecured loan,
because lender charge interest as well as service charges for loan to evaluate
the credit worthiness of borrower.
3) Maturity: As
this is a short term loan, therefore its maturity is one year or less than one
year.
4) Sources: The
major sources of short term secured loans to business firms one commercial
banks and finance companies.
5) Percentage Advance: To extend short term loan to the firm, lender determines the desirable
%age advances to make against the collateral.
Forms/Types Of Short Term Secured
Loan: There are
mainly two types of short term secured loan which are as follows;
1)
Use Of Account Receivable As A
Collateral
2) Use Of Inventory As A Collateral
Now we can
discuss the above two terms given as under;
Use Of Account Receivable As A
Collateral: A business firm can obtain secured short term
loan by;
1)
Pledging Accounts Of Receivables
2)
Factoring of Receivables
Now we can
explain both of them in detail as under;
1) Pledging Accounts Receivables: Short term loans which a extended by bank to firm by
pledging its receivable as a collateral.
Features of pledging Receivables: Following are the some features of
pledging receivable as a collateral given as under;
1) In this case risk of non-payment will
remain with the borrower.
2) Legal ownership of receivable remain
with the firm (seller).
3) The title of receivable will remain
with the seller of goods.
Pledging Process: When a firm request for a loan to
bank or finance companies, then following steps are involved.
1) Evaluating The Quality Of Receivable Pledged: For this purpose bank evaluate the
credit worthiness of the customer to whom credit sale is made. If quality of
receivable is high then lender will extend loan up to 90% of the face value of
the receivables, and if quality will low then bank will extend loan only 25% of
the face value of the receivable.
2) Evaluating The Size Of Receivable: Bank will check the size of receivable because of cost
reason. If a firm has lot of small size of receivable then bank will extend
small amount of loan and vice versa.
3) Establishing Value Of Loan: In third step, the lender establish the value of loan which
is to be granted on the basis of size of receivables.
4) Supplying Of Necessary Documents By Borrower: When the loan value of receivables
has been established then borrower sends the following necessary documents.
1) List of accounts
2) Billing data
3) Amounts involved
4) Credit terms
5) Any evidence like shipping documents
to the lender.
After
evaluating the above things the lender extends loan to the firm.
Methods Of Pledging Receivable: There are two methods of pledging
receivables.
1) Notification Method: Through this method the borrowing firm notifies its accounts that
payment on the receivable are to be made directly to lender. So, the customer
of borrowing firm pays to lender directly.
2) Non-Notification Method: In this method the borrower customer do not know that their
accounts have been pledged and they pay the borrower in the usual manner is
caused non-notification method.
Factoring Of Receivables: Factoring means selling therefore
factoring of receivables means selling of receivables.
Definition: L.J Gilman define it as “the
outright sale of accounts receivable at a discount to a factor or other financial
institution to obtain funds”. In simply we can say that the sale of receivables
to the factors is called factoring.
Features: Following are the same features of
factoring of accounts receivables.
1) In this arrangement, accounts
receivables are sold to the factor i.e. financial institution.
2) In this case risk of non-payment will
transfer to the factor.
3) The title of receivable will transfer
remain with the factor.
4) Legal ownership of receivables
transfers to the factor.
1) Factoring Procedure: Factoring procedure can be easily understand with clear that in
factoring first of all the seller firm receives a purchase order from.
Buyer/customer and then get permission from factor/bank to extend loan/goods.
After evaluate the credit worthiness of customer/buyer the bank grants
permission or credit approved to the seller, then the firm ships goods to its
customer, asking to make payment to factor. In last step the factor deposited
the payment in seller account after deducted fees.
2) Use Of Inventory As Collateral Or Pledging Inventory: In this case a firm or borrower can
obtain loan by pledging inventory as a collateral.
Features Of Pledging Inventory: Bank will accept inventory as a collateral
keeping in used its four major features.
1) Nature Of Inventory: If inventory is perishable then bank avoids to extend loan because its
value as collateral is low as compare to duration goods and bank will extend
against durable goods.
2) Market Ability:
If inventory’s market ability is higher than its value as a collateral is
considered high and vice versa.
3) Price Stability: If the price of inventory is stable then bank will extend loan against
the inventory and vice versa.
4) Cost: Cost of
pledging inventory includes cost of interest rate and service charges because
lender incurs some cost on keeping task to make sure that loan is backup by
same collateral.
Methods Of Pledging Inventory: To obtain short term bank loan the
inventory can be pledged in three different ways.
1)
Blanket/Floating Inventory Lieu
2)
Trust Receipt Inventory Loans
3)
Warehouse Receipt Inventory Loan
I.
Public Ware Houses
II.
Field Ware Houses
Now we can
discuss them in detail one by one given as under;
Blanket/Floating Inventory Lieu: A lender’s claims on the borrower’s
general inventory as collateral for a secured loan is called blanket/floating
inventory lieu.
Features: Following are the some features of
blanket inventory lieu which are given as under;
·
The
inventory pledged under this arrangement consists of;
1) Low price items
2) Small size items
3) That items which can be identify by
placing numbers.
·
Borrower
pledges all his inventory it means lender has claim on inventory in general.
·
Inventory
remains in the having of borrower and he is free to sell it and made the
payment.
·
Proceeds
of sale are remitted with bank.
Trust Receipt Inventory Loan: A trust receipt is a instrument
acknowledging that the borrower held the goods in trust for the lender.
Features: Following are the some feature of
trust receipt inventory loan.
Ø The inventory pledged under this
arrangement consists of;
1)
High Price Items
2)
Large Size Items
3)
Easily Identified Items Number And
Tags
Ø The borrower is free to safe the
items but is trusted to remit the payment against each items along accrued
interest to the lender immediately after sale.
Ø The bank extended loan up to 80% to
100% of the cost of inventory under this arrangement.
Warehouse Receipt Loan: Warehouse is the third party which
is engaged to held the inventory on a security on the behalf of the lender.
Explanation: Under this arrangement the lender
receives control of the pledged inventory collateral which is stored by a
designated agent on the lender’s behalf. After selecting acceptable collateral,
the lender likes a warehouse company to act as its agent and take possession of
the inventory.
Types Of Warehousing Arrangements: There are two types of warehouse
receipt loan.
1) Public Warehouse: Under this arrangement the goods are stored in warehouse and receipt of
goods is held by the lender. Inventory can only be released when the proper
permission is presented at the warehouse.
2) Field Warehouse: Under this arrangement borrower and lender agrees to establish a field
warehouse on the borrower premises for this purpose a certain area is
designated as the field warehouse and is segregated by a fence or some other security
arrangement to certain inventory.