How To Get Help With Your Assets
It might be a good idea to reach out to a qualified financial professional before you fill out any loan paperwork. Schedule an appointment with your accountant to review your assets and make sure there are no red flags that might prevent you from getting your loan approval.
Dont have an accountant? You can find one by talking to trusted friends or colleagues, doing research on the best accountants in your area or checking with your real estate agent.
What Is The Difference Between Asset Finance And A Bank Loan
- 27th August 2021
- Categories:Alpha News, Asset Finance
We are often asked what the difference is between asset finance and a bank loan.
Businesses often use asset finance because it frees up their financial borrowing options elsewhere. The main difference is that it is a contractual agreement rather than an outstanding balance < < as it is with a bank loan.
Asset finance is a loan secured by assets in the business, such as plant, machinery, equipment etc. Bank loans purely base the eligibility on your current financial situation and cash flow.
Banks will consider all your other borrowing and exposure, including any outstanding finance lease facilities. Also, businesses will know that when borrowing for plant and machinery purchases, banks are not the most accommodating . They base their decision on whether to grant you a loan on their perception of your business, not on the value of the asset, as is the case with asset finance.
SMEs rely on bank loans and overdrafts, yet the banks are more reluctant to lend due to stability risk. Businesses, SMEs in particular, who require loans are usually at the start of their business growth, which banks see as a risk. Therefore asset finance is more favourable. In some cases, you can even borrow against your future cash flow . . .
Raising New Equity Capital
If there are further substantial write-downs within the Irish banking industry post-NAMA this could lead to further financial difficulties. Patrick Honohan, a professor of International Financial Economics and Development at Trinity College Dublin, and shortly afterwards to be appointed head of the Central Bank of Ireland, stated on 21 July 2009 that “Unless the loans are valued at unrealistically high prices, the NAMA process will leave the banks with insufficient capital. This is especially true considering the additional loan losses in non-property lending that are inevitable given the depth of the recession and which will have to be provided for.” Professor Honohan was appointed Governor of the Central Bank of Ireland and Financial Services Authority by the Minister of Finance in late September 2009.
On 5 October 2009, the Irish Independent reported that European banks needed to raise substantial equity capital, including AIB and BOI. The article quoted a report by the bank JP Morgan which estimated that the AIB and BoI needed to raise a combined 11bn, 7bn for AIB and 4bn for BoI.
On 8 October 2009, Brian Lenihan, then-Minister of Finance, said that even after selling real-estate loans to the government’s NAMA, that the country’s biggest banks may need further money. Additional funding from the Irish government was highlighted, with Lenihan recognising that it would be difficult to raise funds on the stock market.
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Income From Discharge Of Indebtedness
Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness.:111 Thus, if a debt is discharged, then the borrower essentially has received income equal to the amount of the indebtedness. The Internal Revenue Code lists “Income from Discharge of Indebtedness” in Section 61 as a source of gross income.
Example: X owes Y $50,000. If Y discharges the indebtedness, then X no longer owes Y $50,000. For purposes of calculating income, this is treated the same way as if Y gave X $50,000.
How Asset Lending Works
Asset lending is when money is borrowed to purchase essential assets for a business, such as office equipment, vehicles or even property. If the loan is not repaid then the lender has the right to seize the assets. This means it differs from a traditional bank loan and offers an alternative way to access vital assets your business needs.
Different types of asset based lending contracts mean that each one works slightly differently:
- Asset finance and leasing agreements: The lender buys the assets you need and leases them back to your company for a set monthly amount.
- Hire purchase asset finance: Your business pays a deposit plus monthly instalments for an agreed period . At the end of the term the assets are yours.
- Refinancing agreements: Releases capital tied up in assets by the lender buying the equipment from you and leasing it back.
- Easier to obtain than traditional bank loans
- Fixed payments make budgeting and cash flow simple to manage
- Most agreements have fixed interest rates
- Failure to pay only results in the loss of assets, nothing more
- Options to upgrade can be included in some asset based lending agreements
Disadvantages of asset based lending:
- Can be more expensive than buying certain assets outright
- Long repayment terms in some cases
- Value of equipment acquired through asset based finance cannot be deducted from your profits for tax purposes
Asset lending can help many businesses, but its important to be sure its right for your business model.
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What Is Asset Based Lending
Asset based lending, frequently called ABL, is a type of loan that is secured by various types of collateral. Most commonly used by businesses, asset-based loans are typically secured by accounts receivable, inventory, equipment or real estate. Whereas banks typically approve loans based on a proven record of predictable cash flow, asset-based lenders approach to underwriting is more reliant on the collateral coverage for repayment. This often allows ABL lenders the ability to approve an asset-based loan where a bank would not.
Introduction To Balance Sheets
Notes and coins today make up just three out of every hundred pounds in the economy. The other ninety-seven pounds exist as accounting entries on the books of commercial banks. That means a basic understanding of accounting and balance sheets is essential in order to understand how money is created.
There is no reason to be put off by the accounting terminology if you have ever borrowed money from a friend and left a note on the fridge to remind you to repay them, then you have already done one half of the accounting necessary to understand banking.
In short, a banks balance sheet is a record of everything it owns, is owed, or owes. The balance sheet comprises three distinct parts: assets, liabilities and shareholder equity.
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Financial Statements For Banks
While the general structure of financial statements Analysis of Financial StatementsHow to perform Analysis of Financial Statements. This guide will teach you to perform financial statement analysis of the income statement,for banks isnt that much different from a regular company, the nature of banking operations means that there are significant differences in the sub-classification of accounts. Banks use much more leverage than other businesses and earn a spread between the interest income they generate on their assets and their cost of funds .
Bank Of Canada Assets And Liabilities: Month
View or the latest monthly data. For metadata and background information, see the notes.
Typically published between the 8th and 13th business day of the month. December data are typically published in February.
Legend
| Month-end, Millions of dollars12 | CANSIM |
|---|---|
| Government of Canada direct and guaranteed securities | |
| Treasury Bills | |
| Total Government of Canada Bonds | V36654 |
| Advances to members of Payments Canada | V36663 |
| Securities purchased under resale agreements | V36670 |
| Cash and foreign currency deposits | V36661 |
| Derivatives: Indemnity agreements with the Government of Canada | V1210799372 |
| Securities sold under repurchase agreements | V41886562 |
| Derivatives: Indemnity agreements with the Government of Canada | V1210798116 |
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Financial Statements For Banks: Balance Sheet
A banks balance sheet has certain unique items. We visit each unique line itemProjecting Balance Sheet Line ItemsProjecting balance sheet line items involves analyzing working capital, PP& E, debt share capital and net income. This guide breaks down how to calculate in the subsections below.
To learn more, launch our finance courses online!
Loans and Deposits to Customers
The main operations and source of revenue for banks are their loan and deposit operations. Customers deposit money at the bank for which they receive a relatively small amount of interest. The bank then lends funds out at a much higher rate, profiting from the difference in interest rates.
As such, loans to customers are classified as assets. This is because the bank expects to receive interest and principal repaymentsDebt ScheduleA debt schedule lays out all of the debt a business has in a schedule based on its maturity and interest rate. In financial modeling, interest expense flows for loans in the future, and thus generate economic benefit from the loans.
Deposits, on the other hand, are expected to be withdrawn by customers or also pay out interest payments, generating an economic outflow in the future. Deposits to customers are, thus, classified as liabilities.
Loans and Deposits to Central Bank
In the questions of financial statements for banks, where do these banks store their money? Its like the age-old question: do barbers cut their own hair?
Trading Assets and Liabilities
How Do You Record A Loan Receivable In Accounting
Like most businesses, a bank would use what is called a Double Entry system of accounting for all its transactions, including loan receivables. A double entry system requires a much more detailed bookkeeping process, where every entry has an additional corresponding entry to a different account. For every debit, a matching credit must be recorded, and vice-versa. The two totals for each must balance, otherwise a mistake has been made.
A double entry system provides better accuracy and is more effective in preventing fraud or mismanagement of funds.
Lets give an example of how accounting for a loans receivable transaction would be recorded.
Lets say you are a small business owner and you would like a $15000 loan to get your bike company off the ground. Youve done your due diligence, the bike industry is booming in your area, and you feel the debt incurred will be a small risk. You expect moderate revenues in your first year but your business plan shows steady growth.
You go to your local bank branch, fill out the loan form and answer some questions. The manager does his analysis of your credentials and financials and approves the loan, with a repayment schedule in monthly installments based upon a reasonable interest rate. You are required to pay the full loan back in two years. You walk out of the bank with the money having been deposited directly into your checking account.
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What Are Examples Of Current Assets
There are five main categories of current assets.
In order of most to least liquid, here is a list of current assets:
Cash and cash equivalents are the most liquid of assets, meaning that they can be converted into hard currency most easily.
Cash of course requires no conversion and is spendable as is, once withdrawn from the bank or other place where it is held.
Cash equivalents are any type of liquid securities that are not in the form of cash currently, but that will be in the form of cash within a year.
US Treasury bills, for example, are a cash equivalent, as are money market funds.
2. Short-Term Investments and Marketable Securities
Similar to cash equivalents, these are investments in securities that will provide a cash return within a single year.
These types of securities can be bought and sold in public stock and bonds markets.
In the case of bonds, for them to be a current asset they must have a maturity of less than a year in the case of marketable equity, it is a current asset if it will be sold or traded within a year.
Prepaid expenses are funds that have been spent preemptively on goods or services to be received in the future.
They are not technically liquid because they dont earn a company money however, they are listed among a companys current assets because they free up capital to be used later.
Payments to insurance companies or contractors are common prepaid expenses that count towards current assets.
Liability For The Borrower
A home loan is a liability, or financial obligation, for a borrower. The bank lends you money to purchase a home in the form of a home loan, also called a mortgage. This is a form of debt. By signing the loan agreement, you accepted liability for the debt and its repayment. The lender expects you to repay that loan and with interest. As the borrower, you generally pay the principal and interest in installments over a set period of years. This liability attaches to all signers of the loan agreement, including the borrower, co-borrowers or co-signers, if applicable.
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Ukrainian State Bank Loaned $60 Million To Businessman With Assets In Donbas Conflict Zone
KYIV — Ukraine’s state-owned export-import bank lent $60 million to companies owned by a businessman with interests in parts of eastern Ukraine controlled by Moscow-backed separatists, a new investigation has found.
The businessman, Serhiy Bryukhovetskiy, has also paid millions of Ukrainian hryvnyas in taxes to the separatists and put up as collateral for the loan a Kyiv shopping mall whose ownership is under dispute, according to the findings by Schemes , an investigative news project run by RFE/RL’s Ukrainian Service in cooperation with UA: Pershy television.
The findings raise questions about why Ukreksimbank — which is Ukraine’s third-largest bank by assets and serves as the authorized financial agent for the government when making foreign loans — was allowed to issue financing to an entity doing business with the separatists, possibly in violation of Ukrainian law.
The findings also come as Ukreksimbank’s chief executive is under fire for a confrontation with Schemes reporters who raised the question of the loan as they interviewed him earlier this week.
Corporate registry documents show that the parent company, registered in Horlikva, just north of the regional capital of Donetsk, specializes in the maintenance of equipment and machinery used in mines.
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Is A Home Loan An Asset Or A Liability
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A home loan can be a great way to finance a property. It allows you to pay for your home over a period of time versus paying cash for it upfront. A mortgage can be an asset or a liability, depending on if you’re the borrower or the lender. A liability refers to a financial obligation that you’re responsible for, such as a debt. An asset refers to an item of value that belongs to you.
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Wall St Week Ahead Regional Bank Loan Growth Could Hint At Healthier Supply Chains
A street sign for Wall Street is seen outside the New York Stock Exchange in New York City, New York, U.S., July 19, 2021. REUTERS/Andrew Kelly/File Photo
NEW YORK, Oct 15 – If regional banks show signs of accelerating loan growth when they report earnings in the week ahead, it could signal an easing of the supply chain bottlenecks that have weighed down the U.S. economic recovery from the pandemic, analysts and investors said.
Overall, small banks accounted for 63% of the approximately $520 billion in loans through the federal Paycheck Protection Program launched in response to the pandemic. The program allowed small businesses to take loans that either could be forgiven or would have a 1% interest rate, according to the U.S. Small Business Administration.
Increasing demands for new loans at higher interest rates could signal that small businesses are securing inventory and expanding, said Dave Ellison, a portfolio manager at Hennessy Funds.
“It seems like everybody else has benefited from the economy reopening but the banks because you’ve seen very little loan growth” on account of the Paycheck Protection Program, Ellison said. “The pandemic has disproportionably hurt small businesses, and those are the customers of regional banks,” he said.
As of June 30th, small banks held 15% of total banking industry loans but an outsized share of Paycheck Protection Program loans, holding 31%, according to the Federal Deposit Insurance Corp.
For Companies With High Debt
When banks review loan applications, they have specific ratios and loan covenants that must be met. Companies with high debt-to-worth ratios may fall outside the banks allowed credit approval criteria. Non-bank asset based lenders are not subject to these constraints and can therefore approve an asset based loan structure much easier with more weight on the collateral and future prospects of the business.
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Supplementary Data And Draft Business Plan
On 16 September 2009, NAMA published Supplementary Data Document that contained high level statistic on NAMA, data on property yields, and information on the six covered institutions. The supplemental data indicated the book-value of the loans expected to be transferred to NAMA by the six covered institutions was 68bn. The suggested transfer value was 54bn, with the estimated market value at 47bn.
In addition to the supplementary data document, the Department of Finance published incremental data on 13 October 2009 in a Draft NAMA Business Plan.
| Total, billion |
|---|
| 28,564 | 7.9% |
According to the Supplementary Data Document, the long-term-economic value of the loans transferred to NAMA was 15% higher than the market value. NAMA applied statutory adjustment factors to estimate the valuation of 54bn. The document also noted that asset prices would need to increase from current market values by 10%, for the government and taxpayers to avoid any loss, taking into account subordinated debt. The difference between the 15% uplift to get to 54bn and the need for a 10% uplift for the taxpayer to avoid a loss, was explained in the Draft NAMA Business Plan. This analysis took into account the expected part payment in subordinate debt to the six covered institutions of 2.7bn . This subordinated debt holders may receive none of the proceeds in a scenario where the taxpayers are exposed to a loss.
