Bank Advisor

Archive for November 14th, 2009

The asset based lending industry has acquired an image not considered ‘ideal’. Everyone assumes that asset based loans are not as good as unsecured loans. This image is the outcome of misconceptions that people generally have about asset based loans.

In fact, asset based loans are very competitively priced and offer a lot of flexibility and versatility. They are financial tools offered by a variety of lenders including many money center banks. It is also true is that there has been a phenomenal increase in the overall outstanding value of asset-based loans over the last ten to fifteen years. Despite these encouraging figures, myths still continue to haunt this type of lending. Looking deeper there are some myths that are more common among those doing rounds to falsely scare potential borrowers. Here are some myths and facts:

Asset based loans are taken only by companies in poor financial health- This is one myth that is negated by the fact that an increasing number of healthy companies are opting for asset base financing due to the various advantages it offers. The rates are very affordable and it helps them gain extra leverage for business growth. This is further supported by the fact that such borrowers form the major portion of the borrower community of many leading asset based lenders.

Obtaining asset based loans after having unsecured loans affects company reputation negatively- On the contrary, many companies now prefer to switch to asset based lending to avail of the flexibility and other benefits like lesser number of covenants etc. Those familiar with EBITA and other covenants for unsecured loans would be aware of their restrictive nature and how burdensome they may become especially when the economy suffers a slowdown. As against these four of five covenants, asset based loans require just one or two covenants.

The added flexibility to be able to utilize proceeds as required is one very appealing aspect of asset-based loans. It is basically the value of the company’s assets pledged as collateral that are of concern to an asset-based lender and the availability of the excess borrowing base. The larger the available excess, the better the chances of the company to suitably react in a crisis.

Asset based loans are only concerned with the collateral value- With the understanding derived from a connection with many types of industries, the asset based lender is better qualified to make a correct assessment of the collateral offered and a proper appreciation of their value can help increase the borrowing capacity of the borrower. Collateral is no doubt a very important component as the very foundation of the loan are the assets pledged as collateral and in the case of borrowers that have a negative cash flow, a close scrutiny of the assets is done. However, those companies that have a solid base and are interested in maximizing operations, there are many asset-based lending solutions that strongly rely on financial performance.

Reporting parameters for asset-based loans are very daunting- This type of financing usually has accounts receivable and inventory as collateral. These change from day to day and borrowers have to report these changes daily/weekly/monthly, depending on the risks involved. However, this has become extremely easy with the advent of new technology and takes very little time and effort to complete.

Asset based loans are costlier- Another myth is that such loans are more costly, where in fact they are more economical than unsecured loans.

Larry Lindsey is probably not a name that you know, but he is an important figure in the history of personal finance.   Currently, Mr. Lindsey is President Bush’s chief domestic economic advisor. Prior to that, he was a Federal Reserve Board Governor. But neither of these distinctions are what make Larry Lindsey significant. Instead, it was a little incident at Toys ‘R Us that gave birth to “The Larry Rule.”

The Larry Rule – What No Retail Clerk Will Ever Tell You

In 1996, Larry Lindsey was a Federal Reserve Board Governor. While it isn’t known for sure, it’s probably safe to assume that Mr. Lindsey was then, and is now, a millionaire. An even safer assumption is that he always paid his bills on time and should have had a top-notch credit score. After all, he was a member of the most prestigious financial committee in the world, and his personal credit history was undoubtedly vetted by politicians and regulators before he could be appointed to the Fed.

Despite all of this, Mr. Lindsey was denied a store credit card – at Toys ‘R Us of all places. The reason? He lacked a sufficient credit score due to too many recent inquiries. You see, Larry Lindsey had been trying to prove a point. Whenever a retail clerk offered him an opportunity to apply for credit, he did so. He filled out the application correctly, even stating that he was a Fed Board Governor under “employment.” He listed his six-figure income and all other pertinent data, and until Toys ‘R Us came along, he had always been approved.

It wasn’t that Mr. Lindsey actually wanted or needed all of these retail credit cards. His objective was to point out this flaw in the credit scoring system – applying for too many retail charge accounts can hurt your credit and prevent you from qualifying for real credit cards. Ask yourself, which is more important – the charge card at JCPenny that can only be used at JC Penny, or a real Visa or Mastercard that can be used at JCPenny and everywhere else, too?

To Apply or Not to Apply – That is the Question

On one level, the Larry Rule makes at least a little sense. After all, someone who is out there applying for credit all over town would seem to be in some form of financial distress. When the credit bureaus created their scoring criteria years ago, they didn’t factor in pushy retail clerks who get bonuses for getting people to apply for cards they don’t need. You do need a real credit card. Having two or three isn’t a bad idea. But department store cards count as lines of credit on your credit report, and having too many of them can make you look like an unworthy applicant in the eyes of real credit card companies.

Armed with the knowledge that applying for and receiving retail store credit can be harmful to your credit, you should think twice before applying. First, ask yourself if you really want the store credit card, or are you just filling out the application so that the clerk will stop bugging you? If the store offers you a discount for applying, ask yourself if the money you’ll save is worth the negative impact that the inquiry (or even being accepted) could have on your credit score.

If you actually do want the card or the discount is a real money-saver, then ask yourself this question: Will I need to apply for credit for something important, like a real credit card, a car, or a home loan, in the near future? If the answer is yes, then it is probably best to “just say no” to the retail application. You wouldn’t want an inquiry from Toys ‘R Us to inhibit your financial future.

We highly recommend that you research your credit card options before applying for a card. Then, choose the best one that is best for you, not one placed in front of you by a store clerk.  With this sound financial advice, you will be on track for a great credit future.

Bank Charges are one of the major sources of income for banks. All banks impose charges on certain failed transactions e.g. a bounced cheque, exceeding overdraft limits, returned direct debits etc. Indeed, banks are allowed to impose charges that reflect the amount of work undertaken by administrative staff in certain situations such as customers going into the red or handling a cheque which cannot be cleared due to insufficient funds in the account. If a cheque or direct debit has to be returned, the bank can charge for the cost of this process. However, any such charge must be reasonable. Banks who regularly impose hefty charges between £25.00-35.00 on a customer who is £1.00 overdrawn cannot be said to be acting fairly. The Office of Fair Trading (OFT) declared that these charges were unfair and unreasonable. It is a scandal and many have called it daylight robbery. Banks when asked to produce documents justifying the charges have failed to do so. However, it is likely that the banks will have gathered some ammunition to produce at the High Court in the test case on bank charges in January 2008. The test case relates only to current accounts and not business accounts. The brutal truth is that unfair bank penalty charges have been imposed on millions of people. It has been a merciless punishment on people who may have simply overlooked their current account status or had a late payment of wages. Excessive charging has resulted in many people getting into debt which also has drastic consequences in credit ratings.

The High Court will no doubt be asked to consider whether the charges are fair. The penalties which can be imposed, and which no doubt may be in the individual contract between customer and bank, relate to a range of services following troublesome banking. However, the OFT’s investigation confirmed that banks were imposing illegal and unfair charges. It is widely thought that the High Court will rule in favour of the customer.

Recent research has suggested that about 41 per cent of people do not know the interest rates applicable to an unauthorised overdraft. Many more have simply swallowed the hefty charges imposed on them without even a letter of complaint or fight. It is also worth noting that 19 per cent of people are always overdrawn. These surveys also show that overdraft charges of £4.7 billion were paid by 43 per cent of current account holders last year.

Credit Card / Store Card Charges

With the increasing popularity of advantages associated with credit cards and store cards, almost all banks and big store chains have come out with their own cards for people to shop, withdraw cash and purchase online. The British enjoy paying by plastic and the trend to purchase on credit will continue for quite some time. However, there is a price to pay for such short term financial cushion. Credit card companies and banks charge grossly handsome penalties when customers fail to make their minimum repayments by the due date. Many card providers charge annual fees in the subsequent years although there may have been a waiver of such a fee in the previous year. High interest rates are also imposed when someone goes beyond the allowed limit.

The Office of Fair Trading found that the charges imposed on credit charges were also unfair and unreasonable. It was a long battle but the victory was an important one for the consumer. Credit card charges can be reclaimed and it is worth remembering that the High Court test case will only focus on bank current accounts and does not affect credit card or loan charges.

How to Claim them back

There is no doubt that these charges result in many people heading into more debt and finding themselves in a helpless position. Single parents, pensioners, students and hardworking people in general suffer greatly. The charges can add up very quickly over the years and can amount to thousands of pounds.

If you feel that you have been unfairly charged by your bank then you can claim yourself or seek some professional help. When trying to get the right amount of compensation it is always worth seeking guidance and allowing skilled representatives to handle the entire claims process. Dealing with bank letters and fighting for the correct compensation takes up time and effort. Such energies are often spent on earning a living and looking after the family.

People will often be told that a simple letter of complaint to a bank will get you the desired result. It is not always so straightforward. Some banks are familiar with standard complaint letters and will often reject complaints. Compliance officers are employed by banks to defend claims. Often, if the banks do decide to compensate, there may a payment as a ‘gesture of goodwill’. Accepting such offers is simply giving the bank the upper hand. Customers deserve to have all of their charges refunded with the proper interest.

The Financial Ombudsman Service (FOS) which deals with rejected claims does not help on how to present a claim. How a case is put is very much down to the individual. The FOS will simply assess a claim on the arguments it is presented with. In such cases, it is always worth getting professional help when fighting large financial giants for compensation.

Claiming against your bank will not result in your account being closed. Under section 14 of The Banking Code, the Standards Board advised banks “to ensure that they do not make a disproportionate response to customers claiming back these ‘default’ fees and treat the customers sympathetically and positively.’

Furthermore, any threat to close an account would be contrary to the Financial Services Authority’s (FSA) principles on treating customers fairly (TCF).

Specialist organisations fearlessly fight on the behalf of the consumer to claim back excessive penalty charges. Complaint letters will be carefully drafted and may include legal precedents which help in the battle to get the right amount of money. The workload involved in tackling bank and credit card companies is substantial. Dealing with phone calls, rejection letters, drafting statements of claim, taking rejected claims to the FOS and calculating correct compensation is a meticulous process. Specialist compensation firms also have useful contacts such as Solicitors and Barristers who can assist and advise on any complex areas.

Such specialist firms also can help with all other types of unreasonable charges. As well as helping reclaim bank account charges for both current and business accounts for the last 6 years, there can also be claims for reclaiming credit card charges, mortgage exit fees, mortgage arrear fees, Payment Protection Insurance (PPI) and other penalty charges.

Most compensation specialists are registered with the Information Commissioner which means that they abide by Date Protection rules. This provides a safe secure environment for your confidential information and one can rest assured that information will not be passed to third parties without consent.

The majority of firms handling such claims for compensation operate on a no win no fee basis. If successful, the firms charge a percentage of the compensation won and this will or will not include VAT. These firms will only charge you for their services once they have successfully claimed back from the bank on your behalf. In the event that the firm fails to get back anything from the bank (though chances are very low) you will not be charged a single penny. There is nothing to lose and plenty to gain.