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From time to time we will be publishing blogs containing useful information for the Global Commercial Finance Industry, as well as information concerning our services.   We will be announcing new blogs on LinkedIn and Facebook as they are published.

Building an Effective Credit Package For Larger Transactions

Posted on February 18, 2022

Applying the extensive experience of its Principals, Aperio offers workshops and seminars, both for groups and individually, for commercial finance professionals, on how to prepare an effective credit package for larger transactions.  For smaller transactions, where financial institutions require limited financial information, please visit "New Products & Services."

What is a Credit Package? - A credit package clearly describes how the financial institution will be repaid.   A credit package contains all the necessary information for a credit officer to approve a request for financing from a business customer.   A credit package should contain the following elements:

                                                Summary Information

Summary information is designed to give a credit officer important information about the prospective borrower as well as information about the transaction.   Summary information is similar to a well-wrotten newspaper article - "Who/why/when/where/how."   Summary information should include:

  • Borrower information - Name, and contact information of the borrower/lessee,  and the name(s) of the responsible officer(s) of the borrower and, as applicable, the names(s) of all additional guarantors.
  • Corporate Governance - Legal organization of the borrower, and the jurisdiction where the borrower is located, tune in business.
  • Brief transaction information - the amount requested, and the reason(s) for the request.
  • Requested Terms - Type of loan or lease, requested repayment term, amount and frequency of repayments.

Summary information will likely include the financial institutions's standard credit appliction, signed by an authorized representative of the potential borrower/lessee, authorizing the financial instituton to verify all the information provided by the potential borrower/lessee.

                                                       Narrative

The narrative provides more detail about the propsective borrower/lessee, simplar to the body of a well-written newspaper article.   The narrative provides a credit officr with A narrative should contain the following information:

  • History - Brief history of the potential borrower/lessee, including corporate governance, description of products or services, and major customers.
  • Justification - Why is the prospective borrower/lessee is requesting the loan or lease.  For a lease, the narrative should describe the equipment, the reason why the equipment is needed such as a business expansion or replacing old equipment, the benefits including increase revenues, cost savings, or both.   For short-term transactions, such as a working capital loan, benefits might include the ability to take trade discounts, make bulk purchases of raw materials, and other benefits.     Benefits from extending the loan or lease is the borrower/lessee's primary source of repayment.
  • Financial Summary - Summary information from the potential borrower/lessee's financial statements, a summary of the amount of cash going through the business, from bank references, statements of electronic payments such as M-Pesa in Kenya, and supplier references (especially from suppliers offering credit terms).
  • Address Potential Questions - For every transaction, a good credit officer will raise questions on events that could effect the ability of the borrower/lessee to repay the obligation.   A good narrative anticipates these questions, and directly addresses them, rather than waiting for the credit officer to ask them.

Detailed Financial Information

All information required by the financial institution, likely including:

  • Business financial statements and tax returns.
  • Financial statements on all guarantors (individual and corporate)
  • Information about the equipment supplier.

Considering Cashflow as a Primary Source of Repayment

Posted on January 28, 2022

Many lessors, especially in emerging markets, consider the value of additional collateral, owned and pledged to the financial institution, to be the primary source of repayment of an obligation.   This is an incorrect and often dangerous approach for the following reasons: 

  • Discriminates against service business that do not normally use capital equipment or own real property.
  • Over-reliance on estimates of re-sale value of pledged collateral as a source of repayment.

         Consider the Following Example (from an actual transaction):

  • A company makes chocolate covered crackers, for sale at retail outlets.
  • An enrober, costing approximately $200,000,  is required to place chocolate on the crackers.
  • The company sells both milk and dark chocolate crackers.
  • Without a second enrober, the company must shut down, to shift from milk to dark chocolate.
  • The company incurs $6,682/mo. in direct labor costs from shifting from milk to dark chocolate.
  • Lease payment for a 2nd enrober is $3,804/mo.
  • Net savings from direct labor costs, after lease payments - $2,878/mo.

Lesson Learned - The primary source of repayment are the economic benefits gained from using the leased equipment, not from the value of collateral,  either the leased equipment or additional collateral offered by the lessee to the lessor as additional security.

Aperio Associates provides comprehensive seminars and workshops, given individually and in groups, covering all aspects of credit, underwriting and pricing.



IFC GLOBAL LEASING TOOLKIT

Published in February 2011



The IFC Global Leasing Toolkit ("the Toolkit") is a comprehensive guide to starting and operating a leasing entity.    Subjects covered include:

  • Starting and operating a leasing entity.
  • Funding of a leasing entity and funding of lease transactions.
  • Marketing and sales for leasing entities.
  • Lease pricing.
  • Credit procedures, underwriting of lease transactions, risk management.
  • Documentation and insurance.
  • Accounting for leasing entities.
  • Information Technology systems.
  • Glossary of lease terms.

In addition, the Toolkit contains 4 "Focused Toolkits," covering specific leasing markets, as well as regulation and supervision of leasing entities.  The Focused Toolkits include:

  • Leasing of Agricultural Equipment.
  • Leasing of Sustainable Energy Equipment.
  • Regulatory and Supervisory Frameworks Applying to Lessors.
  • Islamic Leasing ("Ijarah").
  • The Global Leasing Toolkit is now in wide use by the global commercial finance community. Please contact us if you are interessted in obtaining a copy of the IFC Global Leasing Toolkit.





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