accounting types

7/30/2019 ACCOUNTING TYPES

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PresentationOn

Corporate Finance

Presented ToMam Madiha Khan

MBA (Evening)6st Semester

UNIVERSITY OF EDUCATION ,Lahore,MULTAN CAMPUS


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Farhan Sarwar 269

Qurat Ul Ain 270

Hasnain Mohai-Ud-Din 304


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Topics:-What is Financing?

Techniques Of FinanceTypes of Financing

8 Important Types FinancingHow a Bank do Financing ?


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This portion will be presented byHasnain Mohai-ud-Din

Roll No.304

What is Financing?

Techniques Of Finance


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What is Financing?The act of providing funds for business

activities, making purchases or investing. Financial

institutions and banks are in the business offinancing as they provide capital to businesses,consumers and investors to help them to achievetheir goals.


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Explanation Of Financing:-Financing is basically when you ask a bank (or

lender of some sort) for money that you promise torepay. In other words, when you buy a car, if you don't

have all the cash for it, the dealer will look for a bankwho will finance it for you. Upon approval, the bankwill pay the car dealer the money for the car and thenthey will send you a bill each month. The bank will

lend you this money if you agree to pay interest on topof the money lent to you.So, in essence, financing is borrowing money with apromise to repay the money and some additional feeon top of that...


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Short Term FinancingShort term financing is the type of financing

which is done for only one or less than one year. It

is opposite of long-term.For Example: letter of credit, credit cards, creditpurchase etc.


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Long Term FinancingLong term financings are long term liabilities thathave a term life of more than one year offered and theircommon features are the principal amount, interest rate,defined term and future settlement amount.

For example, this might include making payments on a 20year mortgage. Another long-term finance example wouldbe issuing stock.


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Interest Rates In a normal economy, interest rates on short-term

loans are higher than interest rates on long-term loans.

In a recessionary economy, however, interest ratesmay be low and short-term loan rates may be lowerthan long-term loan rates.


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Back-to-Back FinancingIn foreign exchange, two equivalent loans issued

by two companies in two countries to offset eachother's currency risk.

For example, suppose an American companywishes to open a European office and a Europeancompany wants to open an American office. TheAmerican company may lend the European company

$1 million for start-up costs. This loan is calculated indollars. At the same time, the European companyloans the American company the equivalent of $1million in Euros to help with their start-up costs.Because both loans are made in the local currencies


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There are two main sources of

finance:-

Equity Financing

Money invested into your business in exchange for a sharein its ownership.

Debt Financing

Usually in the form of a loan where the principal amountborrowed and interest accumulated on the loan needs to be paid.


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Sources of Equity Finance Available to Business

Personal Savings:

Money that you personally invest into the business.

Friends and Relatives :

People that you personally know invest into thebusiness to lend assistance.

Angel Investors:

Wealthy individuals who lend their personal financesto a business in return for a share in its ownership.

Venture Capital:

Applications to professionally managed third parties such asa superannuation fund who lend finance based on a goodbusiness plan.


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Secure Debt Financing

Leasing:Hiring out equipment for a regular fee for the duration of the lease term,

with no outlay to actually purchase equipment.Term Loans:

Paid back to a financial institution over an agreed period.Credit Cards: easy to acquire financial institution loans that carry high interest

rates.Bank Overdrafts:

Where you withdraw more than your account contains, with interestcalculated on your outstanding balance.

Commercial Bills:Short term loans where the amount must be paid in full upon reaching

expiry.Loan Programs:

Short term loans set up to assist small business with initial start upexpenses.

Trade Credit:Deferred payment of goods and services purchased form a supplier.


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Different Types Of FinanceCONVENTIONAL LOAN:-

The easiest way to get car finance is to go to a bank orfinance company and take out a loan, which is usuallysecured against the vehicle itself. Most loans from finance

companies must be paid off over two to five years, althoughbanks offer personal loans that can be repaid over a longerperiod.Automotive loans are generally set at a fixed interest rate,which simplifies budgeting for repayments. One of the

biggest factors behind the record sales of new cars has beenthe low interest rate environment and the ability ofconsumers to borrow against the equity in their homes tobuy new cars.


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PERSONAL LEASEA personal lease basically means you rent the car for agiven period (usually one to five years) and make monthlyrepayments as you would when you are renting a house.

The big difference is that at the end of the agreed rentalperiod, the car may be sold or, in some cases, the financecompany may take it back and sell it as a used car.

The personal lease is generally used by people who will use

their car for private or household use more than 50 per centof the time, although some tax deductions may be availableif the vehicle is also used for business purposes.


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HIRE PURCHASEThe hire purchase option is often used by small businesses becauseof the flexibility it offers. As with a lease you are obligated to buythe car by making a final payment at the end of the agreedhire purchase period. This payment is known as the balloonpayment.

The hire purchase option gives a business the ability to arrange thedeal in such a way that the monthly repayments are suitable forthe businesss cash-flow and budget by increasing the size ofthe deposit or balloon payment, the monthly payments can be

made smaller.This is handy for businesses that are starting up and have a lot of

different calls on their cash-flow. some tax deductions may beavailable for depreciation and interest charges.


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OPERATING LEASEThis is the best option for the business that runs its vehicles hardand turns them over frequently, such as a company with salesrepresentatives or delivery vehicles that are constantly on theroad.

Under an operating lease, the financing company retainsownership of the vehicle and provides the customer withexclusive use of the vehicle for one to five years in return for leaserental payments just like a long-term hire car.Importantly, the user does not have to worry about the residual

value at the end of the lease and the finance company bears therisk of losing money on the resale of the vehicle. Operatingleases will not show up as assets on the balance sheet, so vehicleborrowing costs will not affect gearing levels. In addition, leasepayments are fully tax-deductible, except for luxury vehicles.


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CHATTEL MORTGAGEThis financing option suits businesses that account for their operationson a cash basis. It works the same as a hire purchase agreement: thecustomer makes a series of monthly payments, then a final balloonpayment. It also offers a great deal of flexibility, because the buyer isable to set the length of the lease payment and adjust the monthly

repayments by increasing or decreasing the amount paid as a deposit orballoon payment.

Under a hire purchase agreement, businesses are allowed to claim backsome or all of the GST contained in the price of the vehicle. But where abusiness that uses an accrual accounting system can claim the GST

back in one Business Activity Statement, businesses that use a cashaccounting system must claim the GST over the full term of the financecontract.


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OTHER OPTIONSFinancing companies have expanded their productofferings in the past few years, and many of theEuropean marques including Volkswagen,DaimlerChrysler and BMW follow the example set bytheir parent companies, which often offer customers acomplete range of banking and financial servicesproducts.

In Australia, automotive financing companies offerproducts including insurance, f leet management,maintenance, fuel cards and even credit cards.


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This portion will be presented byQurat Ul Ain

Roll No.270

8 Important Types of Financing


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1. Take-Out FinancingBanks usually lend for short-term. It is because theirsource of funds for financing comes from deposits whichare usually for a maximum period of 3 to 5 years. However,presently banks are encouraged to provide finance for long-

term projects like infrastructure industry.Hence when a bank, say, lend for 10 years against a 4

years deposit, there is a problem of continuing the loanafter 4 years. It is possible that the bank will continue to getdeposits every year. Yet, the fact today is a 10-year loan has

been made based on a 4- year deposit which is a risky affair.In such a situation, few banks will come together and

under an agreement each one of them will take up the loanportfolio in turn, for a fixed period of time till the loanmatures.


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For example:-If Bank A has provided a 10 year loan, with anarrangement with Bank B and Bank C whereby, after theend of the 4th year, Bank B will finance the loan for next 3

years and Bank C will finance the loan during the last 3years.

Illustratively, the financial arrangement works asfollows: Bank Period of loan financing Bank B and C havedone take out financing. This system of financing takes

care of banks' asset-liability mismatch; long-term projectscan be financed by Commercial Banks; funds can beensured for nationally important projects likeinfrastructure industries.


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2. Revolving Credit FacilityUnder a Revolving Credit Facility a bank fixes up acredit limit to a borrower for certain period, say Rs.10 crorefor 3 years period. The borrower will get a maximum creditfacility of Rs.10 crore at any point of time once the loan is

repaidThe borrower's facility automatically gets renewed up

to Rs.10 crore during the 3 year period any number oftimes. In other words, the credit facility revolves around

with a maximum of Rs.10 crore outstanding at any point of

time over a 3 year period.In principle, under a Revolving Facility there is no

formal repayment period. The borrower is allowed to draw,repay and again draw throughout the loan period.


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3. Ever greening of LoanSometimes a bank provides a second finance facility toa borrower to help him to pay back the original loan. Whyshould a bank do it when the bank's exposure to the

customer remains same?It is because when a borrower defaults on payment of

interest/principal to the bank as per prudential norms, theloan account will become an NPA and the bank has to

make provisions. To avoid such an unpleasant situation andto show a rosy picture of bank's loan portfolio, sometimesbanks do resort to ever greening. RBI does not permit thistype of replacement credit.


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4. Syndicated LoanIt is a loan facility provided to a single borrower by a groupof banks. As the loan is extended by a group of lenders, the sizeof syndicated loan is normally large and a single lender/ bankermay not have been in a position to extend such a facility.

It could also be that a single lender may not like to havesuch a large exposure (credit risk) to a single borrower.Syndicated loans are arranged to finance projects needing largesums of money where the credit risk is also high. These loans arefor financing medium to long-term requirements.

Since, the bankers involved in providing such loan facilityare many; usually co-ordination work is done by a 'lead manager'

who acts as an intermediary between the lenders and theborrower.


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5.Bridge LoanBridge loan is a short-term temporary loan extended by financialinstitutions to help the borrower to meet the immediate expenditurepending disposal of requests for long- term funds or regular loans.

For example, when a borrower's application for project finance is

pending for final sanction, the bank may extend a bridge loan to theborrower to meet urgent expenses. Usually, a bridge loan gets repaidout of the main loan when sanctioned. During 1980's corporate used toavail of bridge loans from banks against the expected subscription onpublic issue of debentures, equity, etc.

Here, the bridge loan is not against any main loan arrangementbut against anticipated cash flow. Again, if an individual is negotiating

the sale of his asset, say a house, a bridge loan may be extended by abank to meet the seller's immediate cash requirements. The loan willbe paid off when the borrower realizes his sale proceeds.

Bridge loan is relatively risky for the bankers when repaymentdepends upon an external factor not under the control of lenders.


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6. Consortium FinanceUnder consortium finance a large credit facility may bejointly arranged by a combination of several banks. Usually, oneof the banks in the group will act as the leader for the credit. Theconsortium leader will extend a larger share of the credit as

compared to other banks in the consortium.The word consortium here refers to 'a combination of manybanks who have agreed to extend the credit facility'. The share ofcredit agreed to be extended will be decided by the banks in thebeginning. The borrower need not deal separately with all thebanks in the group.

Usually, he deals with the consortium leader who takes careof other banks' credit. In India till two years back, as per RBIguidelines, large credit facility, say Rs.10 crore and above, shouldbe granted only under consortium arrangement.


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7.Preferred Financing In the highly competitive world of banking today, banks arereaching out to customers, particularly high net worth or wealthycustomers. One area of lucrative finance for bankers is consumerfinance, more particularly car finance.

A preferred financier is a lender or a bank, which provides largeconsumer loans like car loan under an arrangement with the carmanufacturer. Because of the tie-up, the manufacturer agrees toprovide some concession in the car price and some additionalfacilities in the car.

Thus, the manufacturer makes available for two reasons. One,purchase price is assured and second it gives some push for thedemand of that car. Preferred Financier also benefits. He gets

wealthy customers. Default in the consumer finance sector isminimum because most of the customers have regular income.


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8. Guarantee Services/Non-fund

Based BusinessNon-fund based business is not a credit facility or a financialassistance. However, the banks make sizeable income out of non-fundbased business, mainly from guarantee services. This has explainedbelow.

Banks offer 'Guarantee Services' to valued customers. Guaranteeservice refers to a legal undertaking by the bank to pay a certain sum ofmoney to a third-party or a creditor in the event of the bank'sclient/customer fails to fulfill his part of obligation.

The obligation may be to pay some money or to perform certainduties like a contract job. The guarantee from bank enhances thecertainty of performance or payment.

Usually, banks issue guarantees on behalf of their customers infavor of Government Departments like Customs authority saying if thecustomer does not perform under a contract or does not pay therequired sum, the bank will pay the money or damages.


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How Bank Do Financing

This portion will be presented byFarhan Sarwar

Roll No.269


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How Do Banks Make Money?You may not realize it, but banks are just another kind ofbusiness. Like all businesses, they can differ in size, overallfunction and level of success. Nonetheless, they do share onething in common. Banks need to make money to continue

operating.Most commercial banks make money in three ways. First,the majority of revenue comes from accepting deposits fromconsumers and then lending that money, with interest, out toindividuals and businesses in the form ofbank loans. You aremost likely very familiar with the fact that banks also make

money by charging fees. Additionally, banks even earn returnson investments they make. Below is an explanation of how banksaccomplish these methods of producing revenue.


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Bank Funding Comes from Your

MoneyDo you ever wonder why long-term investments,like CDs and money market accounts, provide higher interestrates than checking or traditional savings accounts? Perhaps youhave questioned the minimum balance you are required to

maintain. The truth is, your money earns your bank money, too.The money you deposit into an account is what funds thevarious loans banks offer. From mortgages to personal loans, thebank essentially borrows money from your account, lends it tosomeone else, collects interest on it and then returns it to you.Of course, your actual balance never changes unless you make a

deposit or withdrawal, but your money is always being put touse.


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ContinuedIf you want to make a withdrawal from your checking account,

the bank must provide it to you right then (hence the commonterm, demand account. This means that the bank must maintainenough cash on hand for customers to access their account funds at anytime. On the other hand, when you commit to an investment period of

several months or years, the bank can loan money out without youneeding it for a while. You are usually rewarded for helping the bankearn more money from interest payments by receiving a higher interestrate yourself.

How does a bank profit from interest they collect when they pay

you interest too? Consider this: Your money market accountof $50,000with a 1.25% APY earned you an extra $625 this year. Thats great. Yourbank loaned out your $50,000 for part of a home loan, plus much morefrom other depositors, and collected several thousanddollars ininterest payments. Thats great for your bank as well.


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How Much of Your Money Can the Bank

Use?

A bank can't use 100% of the funds deposited in theinstitution to loan out or invest. Indeed, banks are requiredto keep some of your money in reserve. The FederalReserve requires that banks with net transaction accounts

of between $10.7 million and $58.8 million hold back 3% inreserve. Those institutions with more than $58.8 millionmust hold 10% in reserve. It is important to not that these"transaction" accounts are those, like checking accounts,that are expected to be used regularly. Reserve

requirements are lower for accounts, like savings accounts,that have limitations related to how often depositors can

withdraw their funds.

The bank can keep using the money over and over

again, too, in order to keep things moving.


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Bank Fees Add Up

Interest alone does not make up the sum of a banksprofits, however. The fees a bank charges in the form ofservices and penalties also attribute to a large portion oftheir revenue.

Consider all of the fees you have paid over the years.Banks charge monthly service fees for maintaining anaccount, withdrawal fees when you use an ATM fromanother bank, application fees for obtaining loans, andnumerous penalties for overdrawing, bounced checks, etc.

The list goes on. While none of these individual fees areconsiderably large, though you may have lost an hours payor more to one, the sheer number of charges that occurevery day adds up to big bucks.


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How Much of Your Money Can the Bank

Use?

A bank can't use 100% of the funds deposited in theinstitution to loan out or invest. Indeed, banks are requiredto keep some of your money in reserve. The FederalReserve requires that banks with net transaction accounts

of between $10.7 million and $58.8 million hold back 3% inreserve. Those institutions with more than $58.8 millionmust hold 10% in reserve. It is important to not that these"transaction" accounts are those, like checking accounts,that are expected to be used regularly. Reserve

requirements are lower for accounts, like savings accounts,that have limitations related to how often depositors can

withdraw their funds.

The bank can keep using the money over and over

again, too, in order to keep things moving.


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ContinuedLet's say you put $1,000 in the bank. A smaller bank mustkeep 3% in reserve, amounting to $30. That means thatthe bank can lend out $970 -- and earn interest on thatmoney. The loan is used to buy something, and theseller can put that money into the bank. Out of thatmoney, the bank can lend out all but 3%, so it'spossible for the bank to lend out $940.90. However,that money isn't new. It is, conceivably, still moneyfrom your original deposit.

Banks use your money over and over again, inorder to keep the economy moving, as well as tocontinuing making its own money.


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Banks Make Investments, Too

Bank financing and fees comprise most of a banks profits, but

there is one more strategy they employ. As many businesses do, banksattempt to maximize profits by making their own investments that willhopefully earn good returns. However, they cannot simply make anypurchase they wish. Banks must keep a certain amount of depositsliquid at all times, which is defined by the FDIC, and then must

primarily invest in loans. Anything other venture must be very low-risk.If you are concerned that banks are gambling your money oninvestments you never authorized, rest assured that they are limited inwhat they can do. Banks do not invest depositors money in anythingbut loans. They use extra money for doing so. Further, PresidentBarack Obama has been pushing for more rigid bank regulation lawsand was reported earlier this year as calling for restrictions on howbanks can invest funds. He proposed that financial institutions,including banks, be prevented from owning, investing, or sponsoring afund or a private equity fund that is not related to serving customers.


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The Many Servicesof a Bank

Financial services provided by abank

Bank employees

Services that might be of personalbenefit

The impact of state and federalregulations upon the security of abank


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BANK OCCUPATIONS

Tellers

Platform Bankers

(SAP)

Mortgage Lenders Operations Manager

Branch Manager


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ELECTRONIC BANK SERVICES

Online banking is the fastest growing Internetactivity in the U.S.

Types of Services

Bank Cards

Automated Services


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BANK CARD TYPES

TYPE Check Cards or

ATM/Debit Cards

Stored Value Cards

DESCRIPTION

Bank cards that allow for the

payment of goods andservices to be subtracteddirectlyfrom a bank depositaccount.

Bank cards with preset, limitedvalue.

Used to pay for goods andservices.

Alternative to cash.44


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ELECTRONIC BANK SERVICES

Direct Deposit

Transfers between Accounts

Transfers to a Third Party

Online Banking

Bank by Phone

ATM


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