Tag Archives | bank

Debit vs Credit

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Debits and Credits
Double Entry Bookkeeping

Debits vs Credits in Accounting

When people discuss debit vs credit, they are usually referring to double entry accounting. More specifically, a debit and credit are recorded for each transaction. These two are required for each transaction in order to keep the accounting equation in balance. There is more information about this in the next section.

Today’s accounting software is also based off of the debit and credit account ledgers. In fact, these programs also offer mobile applications to manage your business’s finances on the go. Even if new software reduces the need to understand debits and credits, it is still essential for business owners and managers to be comfortable with. For example, if one has to record an unusual transaction or correct a mistake, it is often necessary that he or she understands double entry bookkeeping.

What is Double Entry Bookkeeping?

Double entry bookkeeping is a method of recording business transactions using at least two accounts for each transaction. Each account receives a debit on the left side or a credit on the right side. Together, the debits and credits keep assets equal to liabilities plus shareholders’ equity. For example, imagine Business A purchases equipment using cash from Business B. Business A would record a debit to equipment, to increase this asset account, and a credit to cash, to decrease this asset account. Business B would record two transactions: a debit to cash and a credit to revenues, as well as a debit to COGS and a credit to Inventory.

The rules are not quite intuitive. They say to increase assets and expenses with debits and decrease with credits. On the other hand, increase liabilities and revenue with credits and decrease with debits. It takes memorization and commitment to learn these rules, but it pays off by having a better grasp of a company’s books.

Debits vs Credits for a Bank

One reason people have such a difficult time learning the difference of debit vs credit is their experience with bank accounts. When a business deposits money into a bank, it credits its account. Conversely, if you have a recurring charge, debit the account to decrease its amount. This is the opposite of the rules stated above for double entry accounting. Why are the bank’s debits and credits confusing? Banks are in the business of lending money. This means that a client’s deposit is a liability on their books; thus, it increases with a credit.

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Debit vs Credit

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What is Investment Banking?

See also:
What Your Banker Wants You To Know
Alternative Forms of Banking
Debt Compliance 101: Keep Your Banker Happy
Manage Your Banking Relationship

What is Investment Banking?

What is investment banking? In this article, you will learn the investment banking definition, about investment bank analysts, about investment bankers as executors, and examples of investment banking firms.

Investment Banking Definition

The Investment Banking definition is an elite financial service to advise companies, individuals, and governments on financial and investment decisions. They also help them raise equity and debt capital. Investment banks help companies develop their investment portfolios and expand access capital markets. Capital markets include the stock and bond markets. Investment bankers are known to be the well-trained and effective contributors in the financial market. Because large firms raise significant capital through selling securities, they usually use the services of an in-house security issuance division or an investment banking institution. These banks often offer cost savings compared to maintaining an in house security issuance division.


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Investment Bank Analysts

Investment banking analysts serve as consultants for companies during mergers, acquisitions, and reorganizations of companies. Consultative services within an investment bank provide guidance and advice about the issue and placement of securities as well as the management of public assets. Furthermore, these analysts evaluate financial markets to guide companies on when to make public offerings.

Investment Bankers as Executors

Investment bankers are able to execute purchases and transactions for their clients. They act as their clients’ agents when purchasing, selling, or trading securities. If a company is in need of buyers for their stocks or bonds, then an investment bank finds those buyers and handles the transaction with appropriate attorneys and accountants.

Raising Capital

Investment bankers raise debt and equity capital for their clients. Raising debt capital includes issuing bonds to generate funds. Raising equity capital includes launching a company’s initial public offering (IPO).

The Buy Side

Investment bankers working on the “buy side” usually handle buying investment services, including the following:

The Sell Side

Investment bankers working on the “sell side” usually handle the trading. In addition, they sell investment services, such as facilitating security transactions, engaging in market making, and selling IPOs.

Examples of Investment Banking Firms

Some examples of investment banking firms include the following:

  1. Goldman Sachs
  2. Morgan Stanley
  3. JP Morgan Chase

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What is investment banking, Investment Banking Definition
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What Does A Lender Want To Know?

See Also:
Relationship with Your Lender
Finding the Right Lender
The Dilemma of Financing a Start-up Company
Every Business has a Funding Source, Few have a Lender
Required Rate of Return
Venture Capital

What Does A Lender Want To Know?

I had a conversation with a prospect that needed working capital funding. He asked, “What does a lender want to know?” I hear this from every prospect I meet with. So, I gave my normal answer, “We will need personal and business financial statements, a completed application, detailed information on accounts receivable and inventory, and that is just the beginning.” After leaving the prospect, I realized not only did I not answer his question, but also I have never totally answered that question. I now know, the prospect is really asking me what information the lender is looking for so he can get the money.

When I answered this question in the past, I just gave a list of requirements and never explained why they were important to the lending decision process. This information is telling the company’s story to the lender. To start with, think of the financial statement you provide the lender as a score card. In the lender’s mind the more income you make the higher your score. As an example, the more runs a baseball team scores the more powerful the team is.

Tell Your Lender This

So after you tell the lender the score of your company, what else does a lender want to know? You should tell the lender about your company with the following information:

How much money do you want to borrow?

How much money do you want to borrow? The lender needs this information to determine the potential to loan you money.

Why do you want the money and how will it be used?

Why do you want the money and how will it be used? Think of this one as if your child or family member asked to borrow money from you. I believe you would want to know what they were going to do with the money.

What primary source will generate the funds to repay the loan?

Some ways the lender might expect you to repay the loan are; selling a building, producing a product and selling the inventory, or increasing the profits of your business to generate cash flow.

What is the secondary source of repayment?

Amazingly, lenders want to be repaid as you would if you were loaning money. So they consider such things for their repayment as liquidating equipment or injecting additional capital from personal funds.

How will the loan be secured?

How will the loan be secured (collateral)? The lender wants a security interest in whatever you are going to do with the money.

Who will guarantee the loan?

Who will guarantee the loan? From the lender’s point of view, you must be 100% sure of your ability to repay the loan. And, you must be willing to put your personal assets on the line. Otherwise, they would be risking their job by making a potentially bad loan.

The better you tell your story the better your chances are of getting the money.

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lender want to know
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Choosing a Bank

See Also:
What are the 7 Cs of banking
Categories of Banks
Finding The Right Lender
How Important is Personal Credit When Negotiating a Commercial Loan?
Bank Reconciliation

Choosing a Bank: Which Bank to Choose?

I was involved in a speaking engagement recently with my friend, a banker named Larry from Community Bank located here in Houston. After our talk a gentleman from the audience, Al, asked us “Are banks different and if so, which one should I choose?” Larry answered first and after his response all I could say was “I agreed.”

Larry started by saying “Yes banks are different.”

He continued by telling Al that “Part of my answer I know you didn’t request but it is necessary information you need to consider.”

“To answer your question I feel that it is essential for small business owners to write out what they want and need from a bank. This is no different than having specific criteria or objectives in looking for an employee. What do you want the banker and bank to do for you and your business? Then, as you interview banks tell them what your needs and expectations will be and that you require them to be met. Larry stressed this point “Voice them now or be sorry later!”


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5 Considerations for Choosing a Bank

Larry went on to say that for larger businesses there are 5 primary areas of concern that need to be questioned during the process of choosing a bank:

1) Financial Standing

Review the bank’s financial statements. If the bank is a public corporation their financial information is available at www.sec.gov. If they are a private company their financial information is available at www.fdic.gov. Your areas of concern while looking at the financial information are: a) is the net worth of the bank increasing annually, which usually means they are making a profit and b) are bad loans increasing or decreasing. Ask the banker why there are changes in the net worth or bad loans because, rest assured, the banker will ask you why there are changes in your business. Just like a bank will not loan you money when your company is losing money, you do not want to be involved with a bank that is making poor business decisions.

2) Community Standing

What is the perception of the bank by leaders in the community? Talk to business leaders in the primary business sectors, such as real estate, retail, wholesale. Or even to your competitors who may be customers of the bank you are considering.

3) Lending Appetite by the Bank

Larry said “Al, there are two concerns in it this area you should address.”

a) Risk appetites (tolerances) – You need to ask the banker the bank’s lending philosophies, such as loan advance percentages against collateral and loan policies to make sure your business fits within what the bank wants and you can accept.

b) Loan appetites – Is the bank mainly a consumer or commercial lender? What industries specialization does the bank promote? Make sure they already understand your business, because you don’t have time to teach them. What types of loans does the bank not want to make?

Banks’ may mainly make loans on income producing real estate or loans to owner occupied businesses. If you are looking for something else, it is probably not going to happen with the bank you are talking too. What size loan customers does the bank want? Banks normally consider a small business one which has revenues less than $2 million. They define lower middle market businesses as those with revenues from $2 million to $30 million. Finally, they consider middle market businesses as having revenues from $30 million to $250 million. Make sure your company fits into the size the bank wants, or you may not be satisfied with the bank’s effort to get and retain your business.

4) Loan Office Experience Level

“Do you want to deal with an order taker or a decision maker?”

5) Bank’s Desire

Do you feel they are interested and excited about doing business with you? Recall your dating days, how you got excited if the other person appeared interested! This is about establishing a relationship. Is there connection between you and the bank? You must remember there is a price to pay if you have to change your banking relationship.

Larry finished by telling Al, “What it really boils down to is two people getting to know one another and seeing if their needs match.”

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Sukuk

Sukuk Definition

A Sukuk is the islamic world’s version of a bond. It is also referred to as an islamic bond. Because Islamic people do not believe in charging or paying interest, they have been forced to maneuver their way around interest by renting certain assets or by taking ownership in a project.

Sukuk Meaning

A Sukuk structure is slightly different, but the principle is the same as a western bond. When a bank invests in a Sukuk or islamic bond, it is considered to be an investment in a certain project or asset that a company is working on. As the project or asset is complete or purchased, the company must then pay the bank rent expense from the cash flows of that asset or project. Overtime, the islamic bond is paid off in rent using fixed payments over a certain amount of time. Then the par value of the the islamic bond is purchased at a future date.

Sukuk Example

For example, Osman is looking to start a new production line in his business that will require the equivalent of $1 million dollars. Because Osman is building this line in Saudi Arabia, he plans on financing the costs using this islamic bond. He then goes and obtains the financing he needs from an islamic bank. The bank invests in the project. They decide that Osman will owe the bank rent of $80,000 per year and the final par value of the Sukuk, ($1 million) 10 years after the project is done. Notice that this is the same set up as a regular bond where the rent expense of $80,000 is equal to an 8% interest rate. And the par value of the bond is due at the end of the term like a bond.

sukuk

See Also:
Coupon Rate Bond
Interest Rate
What is a Bond?
Nominal Interest Rate
Outstanding Debt

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Prime Lending Rate

See Also:
Interest Expense
Interest Rate Swaps
LIBOR
Federal Funds Rate
Market Rate

Prime Lending Rate Definition

Prime rate, or prime lending rate, is the interest rate commercial banks charge on loans to preferred borrowers. The prime interest rate is lower than the interest rates charged to less creditworthy borrowers. Commercial banks can charge lower rates to preferred (prime) borrowers – usually corporate customers – because these borrowers are less likely to default and the loans are considered safer. The US Prime Rate dates back to 1929.

The US Prime Rate is derived from the federal funds rate, which is set by the Federal Reserve Bank. The prime lending rate is usually set 300 basis points above the federal funds rate. For example, if the federal funds rate is 2%, the prime interest rate would be 5%. The prime rate is typically uniform across the commercial banking industry, but some banks may charge their best customers more or less than the official prime lending rate.

The prime interest rate is also used as a reference point for other interest rates. Less creditworthy customers can borrow at a rate equal to the prime rate plus a certain number of percentage points, depending on the borrower’s creditworthiness. Several types of consumer loans, such as home equity, car, mortgage, and credit card loans are often linked to the prime interest rate. This rate is also considered a lagging economic indicator.

Wall Street Journal Prime Rate

The US Prime Rate is published in the Wall Street Journal, and is therefore often referred to as the Wall Street Journal Prime Rate, WSJ Prime Rate, or the WSJ Prime Lending Rate.

According to the Wall Street Journal, the prime rate is “the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks.” The Wall Street Journal only changes their published Prime Lending Rate when 23 out of 30 of the largest banks in the US change their prime interest rates.

Prime Rate History WSJ

For the Wall Street Journal Prime Lending Rate history, go to: wsjprimerate.us

Current Prime Rate

To see this rate today, as well as other rates, go to: bloomberg.com

Historical Data

For the history of prime interest rates, go to: research.stlouisfed.org.

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Prime Lending Rate, Prime Rate

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Prime Lending Rate, Prime Rate

 

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Negative Equity

See Also:
Working Capital From Real Estate
Asset Based Financing
Loan Agreement
Pledged Collateral
Collateralized Debt Obligations

Negative Equity Definition

The negative equity definition is when the the value of a loan is more than the value of the assets used to collateralize the loan. In addition, negative equity loans usually occurs because the value of the assets has diminished over time.

Negative Equity Explained

Negative equity usually occurs in the real estate market with mortgages. When the price of the house drops from a recession or some other reason, this causes negative equity. It often means that a home/land owner is actually paying more for the house/land than what the asset is actually worth. Also, if the borrower defaulted on the negative equity debt, then the lender would not recoup the amount given simply through repossession.

If the loan is a recourse, then repossession is not the only means of recouping costs. The bank or lender can go after recourse debtors after they sell the asset.

If the loan is non-recourse then it means the creditor will only be able to recoup some of its costs through the sell of the asset. This type of equity has also been known to occur if the value of the collateral asset stays fixed, and the value of the loan payments is less than the interest of the loan. Refer to this negative equity as a negative amortization.

Negative Equity, Negative Equity Definition

 

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