Assignment-2 LOAN SUBMISSION for EQUIPMENT FINANCE Assignment Answer

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INSTRUCTIONS

The assessment for this module is to prepare TWO submissions (see A and B below):

Task A: The first submission is for the client so that they have the facts on all their obligations and fees and the structure of the loan. Remember that what you prepare would, in the real world, need to be presented to the client orally and thus must be understood by them.

Task B: The second submission is for the lender – a detailed outline of the loan application for the lender, in order to gain pre-approval.

PART A – THE CLIENT

Created as a Word document, prepare a comprehensive list of open and closed questions that you would need to ask your clients about the proposed transaction, that is, prepare your needs analysis (ie. Fact Find).
In a suitable format, prepare a submission for the clients ie. a Proposal

What your client submission should include:

The parties to the loan
The security
The facility details
Lender details (options, recommendations) that are able to lend
Confirmation of the client’s complex requirements
The personnel that may be involved: the client’s solicitor, accountant, financial advisor
The client’s responsibilities, so the client fully understands the loan
An outline as to the process timing and what the client needs to arrange
The documentation needed to commence the borrowing
The name in which the client will sign the contract to purchase
A summary of all fees and charges
Your notes detailing how you have provided appropriate contact with the client throughout the complex broking process

PART B – THE LENDER

Prepare a loan submission to the lender for pre-approval.

Your submission should include as a minimum the following headings:

Borrower’s Details
Background
Loan Purpose
Facility Details (refer to scenario)
Funds Position
Servicing Capacity (use manual calculations and show all workings)
Security
Risk Assessment and Management (according to lender policy, guidelines and relevant legislation). Consideration must be given to any environmental, heritage or native title implications
Recommendations
List of Attachments*

* Attachments which would normally be included in a submission to a lender need to be listed for the purpose of this assignment. You will not need to create “dummy” supporting documents.

EVIDENCE REQUIREMENTS

In order to be deemed competent, you will need to evidence the ability to:

Identify client goals, objectives, requirements and assess special financial needs of the client situation
Identify risk issues and risk tolerance and discuss risk management strategies
Model, analyse and prioritise suitable options for client, and reject inappropriate options
Develop explanatory material for client
Interpret and comply with industry legislation, regulations and codes of practice affecting the broking industry
Identify and address issues that require further consideration or consultation with other financial services professionals
Confirm client understands credit options and identify and respond to client concerns
Obtain agreement to proceed from clients
Review impacts of asset, income or expenditure requirements, taxation, complex nature of and forms of securities, and other legal or complex requirements
Establish and prioritise implementation actions, timing and activities according to client needs and situation and explain implementation actions required by the client
Issue instructions to required personnel as per loan structure

SCENARIO

Commercial Equipment Finance

for Ron Hammond and Sean Mandeep

The clients you met with this morning have been referred to you by another commercial client.

They are joint company owners Ron Hammond and Sean Mandeep and they run a successful and growing transport company. They have a diverse client base spread over many industry sectors which is a conscious management strategy to ensure that they do not have significant business risk to a specific market segment or client. All contracts are written with 30-day payment terms. Background industry checks as well as credit history checks are completed on all new business prospects to ensure that there are no adverse issues that may impact on future trading arrangements.

Whilst they have only been trading for 34 months they have a solid business plan with actual results to date exceeding projected sales and profit estimates included in their plan.

The business was established with unsecured (apart from Personal Guarantees) Seed Capital of $500k from a private investor based on a guaranteed return of $45k pa, and an overall term of 5 years which also requires a principal reduction of $100k pa. The loan can be repaid at any time without penalty.

Ron and Sean’s Requirements

To accommodate new contracts in hand and planned future expansion, the applicants require establishment of an Equipment Finance Limit of $470k to purchase Trucks and Dog Trailers in the next 12 months. On the advice of their accountant, a new entity, Hamdeep Holdings Pty Ltd ATF The Hamdeep Discretionary Trust, has been established to purchase equipment which will be internally hired to Hamdeep Transport Pty Ltd (the trading entity). Hire charges will equate to finance payments. Ron and Sean are directors of both companies. The longer-term intention is for the Trust to acquire premises to be occupied by Hamdeep Transport Pty Ltd.

As part of this expansion the company has leased a second depot at a cost of

$6,000pm and will also retain the existing depot.

They currently have 5 employees and where needed are using sub-contract operators to fill shortfall in their delivery capacity. Purchase of new additional trucks and trailers will provide additional capacity and flexibility and reduce reliance on sub-contractors who can be unreliable.

Whilst a limit is being sought, purchases will only proceed where additional work has been contracted or older equipment is being replaced. Applicants are happy to provide half yearly management accounts as an approval covenant to give a lender comfort that projected sales and profits are in line with budgets.

Applicants are keen to reduce debt as quickly as possible and have therefore decided to finance all new equipment over a 48-month term, without a balloon/residual and will commit a refund of GST Input Credits as additional repayments built into the contracted loan structure.

Initial Fact Find

Ron and Sean have both been in the transport industry for many years each being Financial Controllers for major transport companies. Ron has an MBA and Sean a marketing degree. These combined skills complement each other and assist in the effective management of the business. Ron is married and has no dependants. His wife is a school teacher and she will be retiring at the end of the year.

Sean is single and is presently completing a HR degree as they feel that as the business grows these skills will be required.

Ron and Sean have provided the last two year’s financial accounts for the trading business, as well as interim accounts for the current financial year.

(Note: You need to calculate the required servicing for the new debt and surplus required for lender comfort. Assume an interest rate of 8% including the buffer.)

Financial accounts

Year 1- Sales $700k Net Profit $240,000 Year 2- Sales $812k Net Profit $358,000

Current year interim financials to use (10 months): Sales $1.125m, Net Profit

$506,000 (10 months); Operating Costs include – Depreciation $76,000, Interest

$42,000, Sub-contractors $71,000, Directors’ Superannuation $50,000 Wages to partner one $100,000

Wages to partner two $100,000

Payment to private investor (flat fee) $45,000 – Expensed in P&L as Finance Cost Existing Equipment Finance (Chattel Mortgages) repayments of $5,000pm

Applicant Information	Ron Hammond annual income $100,000 (paid as wages), owner occupied property $850,000 with debt of $250,000 (assume 5.2% P&I), credit card limit $25,000 (with debt of $15,000, assume at 3.8%pm), contents $100,000, superannuation $550,000, motor vehicle $40,000 with nil debt.
	Sean Mandeep – annual income $100,000 (paid as wages), owner occupied property $500,000 with debt of $350,000 (assume 5.2% P&I), credit card limit $10,000 (with debt of $3,000, assume at 3.8%pm), contents $85,000, superannuation $150,000, motor vehicle $25,000 with debt of $15,000 (assume five-year debt at 7%).
	Cash in business account $25,000.
Key Balance Sheet Items
		Cash	$25,000
		Debtors	$220,000
		Creditors	$100,000
		Notes: They currently meet all creditor payments at 30-day terms. Debtor collection has been solid with active management of debtors and pre-contract investigation of new clients. They have just signed a delivery contract with Organic Flower Growers who supply to Woolworths Supermarkets state-wide. To accommodate this work, their initial purchase will be a refrigerated Pantec truck at a cost of $145,000. Projected net profit from this contract is $60k pa.

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