Bank Finance (Loans and Credit Facilities)

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Bank Finance

If you are an SME, the banks have a love and hate relationship with you. Sometimes, they chase you to give business loans and credit lines. When tables turn, they chase to recover loans and even threaten you with security cheques issued by you. To be fair to banks, they have no interest in sending you to the jail, they just need to recover what you owe them (especially, when you are facing market challenges).

Types of Bank Finance for businesses:

Business Loan
Apart from offering small loans from the retail banking, many banks also offer Business Loans for Business Banking or SME (Small & Medium Enterprise) customers. Business Loans range from AED 150,000/- to AED 2,500,000/-. These loans are offered by the business banking department of the banks and are disbursed with a turnaround time of 7 to 15 working days. Normally loans are available at the following terms:

Tenor of the loan: 12 to 48 months
Interest rate: Around 18% to 30% per annum on reducing balance
Loan amounts: AED 150,000/- to AED 2,500,000/-

Requirement:

Overdraft
Banks offer overdraft lines to larger sized clients or to mature clients who have good financial understanding and an excellent credit history. In an overdraft facility you pay interest to the bank only on the day’s closing balance utilization of the facility unlike in a term loan where you pay interest irrespective whether you use the funds or not. If you did not understand the previous sentence, just remember that if you get the below choice from a bank, and you need the funds towards working capital of your business, blindly chose option-1.

1. An overdraft facility at 20% interest rate per annum. 2. A Business Loan at 15% interest rate per annum.

Banks choose not to offer overdraft (OD) facility as their revenue becomes indefinite. Some banks offer a basket of facility to customers including a small portion of OD facility. Overdraft lines in a basket of facilities can start from as small as AED 150,000/-. A standalone OD facility offered by banks would be in the range of AED 500,000/- to AED 10,000,000/-. These facilities are generally offered by the business banking/corporate banking department of the banks and are disbursed with a turnaround time of 20 to 30 working days. Normally OD facilities are available at the following terms:

Tenor of the facility: 12 Months, renewable
Interest rate: Around 8% to 15% per annum on reducing balance
Processing fee: 1% to 2.5%

Requirement:

Letter of credit/Trust Receipt (TR Loan)

An LC will be needed if you are importing goods and you need a payment mechanism to ensure your interest is protected. So how does an LC work?

Let’s say you are a printing press (ABC LLC) and you want to import a printing machine from a manufacturer/trader (XYZ Limited) in China for $ 100,000. ABC LLC banks with HSBC. XYZ Limited banks with Bank of China. Both ABC and XYZ do not know each other and hence they do not want to commit as the following risks are associated with both:

If ABC remits the funds to XYZ, ABC is at risk of non-receipt of goods.

If XYZ sends the printing machine without receiving the funds, XYZ is at the risk of non-payment from ABC.

What happens in an LC?

1. ABC asks HSBC to open an LC for $ 100,000. HSBC might ask for the entire $ 100,000 to be kept aside as a deposit or might ask for $ 30,000 and extend a credit of $ 70,000
2. HSBC will send the LC to XYZ through Bank of China
3. Bank of China will advise the LC to XYZ
4. XYZ gets guaranteed that once they submit the documents as per the LC, the payment will be made by HSBC
5. If XYZ does not trust HSBC, Dubai, they can ask Bank of China to confirm the LC at a cost. If this is done, Bank of China will guarantee the payment to XYZ upon submission of documents as per the LC 6. XYZ ships the goods (printing machine) to Dubai
7. XYZ submits all the documents as per the LC to Bank of China who sends the same to HSBC
8. If documents are in order, HSBC sends the payment to Bank of China who in turn makes the payment to XYZ. In a sight LC, payment is received after submitting documents. In an usance LC, payment is received after the usance (waiting) period
9. ABC collects the documents from HSBC after paying the charges and margin if applicable
10. ABC submits the documents including the “bill of lading” to the shipper to collect the goods

IMPORTANT: LC is based upon documents only and banks are interested in only the documents. A sale contract is outside the purview of an LC. Banks do offer LC facilities on 100% cash deposit basis and also based upon a margin basis. LC’s are opened at a pricing of 1.25% to 4% per annum basis depending upon the margin and size of the transaction/company. These facilities on margin basis are generally offered by the business banking/corporate banking department of the banks and limits are setup on an annual basis. This is offered to mature customers with clear understanding of terms and documents under an LC.

Tenor of the facility: 12 Months, renewable
Interest rate: None as the bank is not out of funds!
Processing fee: 1% to 2.0% onetime facility setup fee
LC Charges: 0.25% to 4% per annum

Requirement:

Cheque Discounting/Bill Discounting

If you have been extending credit to your customers and because of which you are having working capital issues, there is a way to cash your future receivables from your customers. Let us say that you extend a credit facility of 60 to 90 days to your customers. Your customers are larger entities and they issue you a post-dated cheque or they accept your invoice, banks will be able to discount these instrument. Tenor of the facility: 30 to 90 days Interest rate: 8% to 14% p.a Processing fee: 1% to 2.0% onetime facility setup fee

Requirement:

Bank Guarantee

A Bank guarantee is a financial guarantee issued by a bank and available to the beneficiary upon claim by the beneficiary. There are the following types of guarantees: Bid Bond: This is used generally while you are applying for a tender. This ensures that the buyer gets a compensation amount if the seller backs out after bidding in the tender Performance Bond: This ensures that a buyer gets compensated if the seller does not deliver as per the agreed terms Advance Payment Guarantee: This is applicable where a buyer makes an advance payment to the seller. This ensures that the buyer’s advance money is secure if the seller backs out after taking advance from the buyer

Retention Bond: This is applicable when there is a warranty period in a contract. Retention bond ensures that the buyer’s interest is protected within the warranty period. If something were to go wrong within the warranty period, the buyer can claim the retention bond Standby LC (SBLC): This is a payment guarantee from a bank to extend a line of credit to the beneficiary. If the beneficiary defaults on the obligation, the bank can claim for the funds from the SBLC issuing bank.

Banks do offer Guarantee facilities on 100% cash deposit basis and also based upon a margin basis. Guarantees are opened at a pricing of 1.25% to 3% per annum basis depending upon the margin and size of the transaction/company. The minimum charge is for a quarter (3 months). These facilities on margin basis are generally offered by the business banking/corporate banking department of the banks and limits are setup on an annual basis. Tenor of the facility: Depending upon the requirement. Generally banks do not open open-ended guarantees. Interest rate: None as the bank is not out of funds! Processing fee: 1% to 2.0% onetime facility setup fee BG/LG Charges: 1.25% to 3% per annum

Requirement:

Please fill the above form if you wish any of the banks to get in touch to discuss any of your business finance requirements.