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ACE have identified banks' three generic lending rationale
- Asset Conversion
- Cash Flow
- Asset Based Lending
Each of the lending rationales identified by Banks implies:
A different source of cash used to repay a bank loan. The specific source of repayment
is dependent on the purpose of the loan, or the use to which the proceeds of the
loan are applied.
The specific financing need determine the nature of the risk to the lenders, who
must be certain to evaluate carefully the factors that will mitigate that risk and
protect them against loss.
The repayment source, loan purpose, and risks dictate the form of protection, monitoring
and control employed by ACE.
ACE primary purpose of KYCC service is to provide our client with support for determining
those risks that might be of primary concern when evaluating a particular credit
and to provide mitigants. It is essential to recognise that lending rationales are
used to characterise a type of loan proposition or credit facility and not a type
of borrower.
Thus, a company is not a "Cash Flow Company" or an "Asset Based Lending
Company". The same company may have several different loans with the bank;
each made on the basis of a different lending rationale.
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PURPOSE
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SOURCE OF PAYMENT
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BANKS
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PROTECTION
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CONTROL
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ACE SERVICES
(Click for details)
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Asset
Conversion
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Financing short-term
Seasonal build-ups of working assets.
Financing other temporary, transactional build-ups of current assets.
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Cash received from the successful completion of the asset conversion cycle.
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Inability to recover costs through successful completion of the asset conversion
cycle.
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Asset liquidity.
Management's ability to complete cycle.
Short time factor.
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Short-term notes.
Frequent opportunity to review situation before renewal.
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Cash Flow
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Financing of long-term assets or permanent working investment and support assets.
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Cash from profits generated and retained in the business over time.
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Inability to generate a stable level of profits over several years.
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Management's ability to generate profits.
Adequate equity cushion
Unused debt capacity.
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Covenants in the term-loan agreement to preserve or enhance the financial condition.
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Asset
Based
Lending
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Evergreen financing of a permanent level of working assets.
Financing other assets under temporary condition of increased risk, as a secondary
lending rationale.
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If asset protection is primary rationale, no payback on an ongoing basis is expected.
If it is the secondary rationale, payback is expected from asset conversion or cash
flow. In both cases, liquidation of assets being financed will pay back the loan
in a distress situation.
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Inability to recover costs by successful completion of asset conversion cycle; inability
to generate profits fast enough to maintain a sound financial condition.
Decline in the value of the assets below amount necessary to pay out senior creditors.
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Management's ability to complete each transaction and to generate a satisfactory
level of profits over a number of years.
Asset liquidity and low shrinkage in a forced sale.
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Demand or short - term notes.
Security and proper documentation.
Debt limitations and convenants where applicable.
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