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Method of financing companies and the role of professionals

Posted September 20, 2018 by EasyFinance.com to Finance 1 0

With this post, we conclude a series of interventions aimed at outlining the forms of financing that the professional could evaluate, to realize business plans or improve the financial performance of their customers, through the use of complex lines of credit such as pool financing, the evergreen, the stand-by, the project financing and the trust.

The pool financing (or syndicated loan) is an operation that allows to cover considerable liquidity needs in the short and medium term through the use of a group of banks (pools) that, by dividing the risk of the transaction, grant a line of credit that can be used according to defined methods. The subjects involved in this operation are three: the company, an agent bank (or leader) and the coordinated banks. The agent bank has the exclusive management of the loan and, at the end of the assessment, sets the maximum amount that can be financed, based on the needs of the company and the level of risk that individual banks are willing to accept (variables which can be periodically reviewed). At the time the loan is granted or in other words, the debtor is considered loanable, all the banks turn on a specific account for the disbursement of the loan to which the individual credit lines are debited.

The evergreen is a useful loan to manage floating needs, for example seasonal or sudden, in which a pool of banks makes available to the company a credit line that can be used until revoked. The beneficiary (borrower) may use the funds granted by the banks several times, even partially, without the need to reimburse the previous withdrawals before proceeding with further use, with the burden of communicating in writing, and with a given notice, the sum he intends to withdraw. The duration can be indeterminate and the banks, in order to withdraw, must comply with a reasonable notice, sometimes higher than one year. The guarantees required are usually personal.

Stand-by is a financing transaction with which a pool of banks - following a specific investigation - grants a credit line with predefined amounts and maturity for short-medium term periods (within 5 years). The stand-by loan may contain clauses that commit the company to use the loan only for a limited period of the year (2-3 months) and prohibits exceeding a certain annual usage. Withdrawals can take place with notice of use to the lead bank within the established time frame (on average 10-15 days).

The bid-line syndicated loan (i.e. at competitive auctions) is an open-ended loan subject to revocation (also in this case with shorter notice for the beneficiary and longer for each of the lenders) and with the right (non-obligation) of use by the borrower, in which a group of banks participate in a competitive auction in order to win a share of the loan. 

Project financing is a technique that favors the financing of initiatives that generate income in the public and private sphere. The granting of these loans takes place on the basis of projects that show a profitability that allows generating a volume of cash flow suitable to repay the loan. If in traditional loans the loan is granted on the basis of the beneficiary's assets and the collateral it can provide, in the project financing the lender is mainly based on the income flows generated by the unit itself and, secondly, on the assets company.

Finally, trusts are subject to private law, mainly organized in the legal form of the consortium or cooperative society, which allow small and medium-sized enterprises to reduce the informational imbalances between the bank and the company and to grant guarantees that allow credit institutions to have exchangeable instruments in case of insolvency.

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