Assignment

Instructions

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

Part A: This 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 will need to be presented to the client orally and thus must be understood by them.

Part B: This is for the lender - a loan application to the lender in order to gain pre- approval.

Part A - The Client

1. Prepare a list of questions that you would need to ask your clients about the proposed transaction, that is, prepare your needs analysis (ie. Fact Find).

2. In a suitable format, prepare a submission for the clients, a Proposal Document.

What your report should include:

1. The parties to the loan
2. The security
3. The facility details
4. Lender details (options, recommendations) that are able to lend
5. Confirmation of the client's complex requirements
6. The personnel that maybe involved: eg. the client's solicitor, accountant, financial advisor
7. The client's responsibilities, so the client fully understands the loan
8. An outline as to the process timing and what the client needs to arrange
9. The documentation needed to commence the borrowing
10. The name in which the client will sign the contract to purchase
11. A summary of all fees and charges
12. Your notes detailing how you have provided appropriate contact with the client throughout the complex broking process

The samples in Appendix A may prove helpful.

Part B- The Lender

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

Your submission should include as a minimum the following headings:

1. Borrower's Details
2. Background
3. Loan Purpose
4. Facility Details
5. Funds Position
6. Servicing Capacity
7. Security
8. Risk Assessment and Management (according to lender policy, guidelines and relevant legislation). Consideration must be given to any environmental, heritage or native title implications
9. Recommendations
10. Attachments

Evidence Requirements

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

• Develop detailed broking options designed to maximise the client's outcomes and reach client objectives which incorporate elements from research and which address complex needs and issues

• Identify and describe key assumptions upon which the plan is based

• Provide a detailed analysis of research strategies and findings

• Test and make appropriate checks on a proposed plan for its integrity and compliance

• Assess the impacts of taxation, social security, economic and other government policies on client investment and financial requirements

• Interpret and comply with industry regulations and codes of practice

• Identify the roles of associated financial advisers and work effectively with them

• Assess broking options, financial markets and investment characteristics

• Use appropriate sales and marketing methodologies and provide justification and research evidence

• Gain client feedback on and/or agreement to the plan

• Prepare materials and personnel to effectively implement complex loan structures

• Establish appropriate audit trails and effectively document records and data.

Scenario

Commercial Equipment Finance for Ray Henley and Steve Manning

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

They are joint company owners Ray Henley and Steve Manning 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 solidbusiness 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.

Ray and Steve's Requirements

To accommodate new contracts in hand and planned future expansion, the applicants require establishment of an Equipment Finance Limit of $500k to purchase Trucks and Dog Trailers in the next 12 months. On the advice of their accountant, a new entity, Henman Holdings Pty Ltd ATF The Henman Discretionary Trust, has been established to purchase equipment which will be internally hired to Henman Transport Pty Ltd (the trading entity). Hire charges will equate to finance payments. Ray and Steve are directors of both companies. The longer term intention is for the Trust to acquire premises to be occupied by Henman 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

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

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

Steve and Ray 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 10% for the proposed debt)

Financial accounts

• Year 1- Sales $700k Net Profit $240,000

• Year 2- Sales $812k Net Profit $358,000

• Current year interim indication- Sales 1.125m Net Profit $506,000 (10 months) Operating Costs include - Depreciation $86,000, Interest $52,000, Sub-contractors $71,000, Directors' Superannuation $60,000

• Wages to partner one $100,000 (paid as Fully Franked Dividend)

• Wages to partner two $100,000 (paid as Fully Franked Dividend)

• Payment to private investor (flat fee) $45,000- Expensed in P&L as Finance Cost

• Existing Equipment Finance (Chattel Mortgages) repayments of $5,000pm

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 Coles Supermarkets state-wide. To accommodate this work their initial purchase will be a refrigerated Pantec truck at a cost of $145000. Projected net profit from this contract is $60k pa.