A personal loan is a specific kind of debt. In case of a loan the financial assets are redistributed over a period of time normally between the borrower and the lender like all other debt instruments. The process of this loan mainly involves two steps as:1. The specific sum of money required by the borrower is initially given by the lender which is known as the principal for a stipulated amount of time.
2. In turn the borrower is duty-bound to repay or pay back the total amount of the principal plus the amount of interest calculated during that period over the principal amount to the lender after the completion of the time period.In general the principal amount and the interest are paid back in the form of normal installments or may be in partial installments or in the form of annuities. It is important to remember that each installment amount should be the same.Interest is nothing but the additional money that is charged by the lender for providing a certain amount of money to the borrower as debt. The interest acts as an incentive in case of the lender which encourages him to provide the loan. In case of legal loans, the two parties concerned in the case are enforced to sign a contract for the obligations and restrictions. It can also place the borrower under additional restrictions called loan covenants. The principal task of the financial institutions is that they act as a provider of the loan amount.Common personal loans are car loans, home loans, credit card loans, installment loans, payday loans and such other loans. In case of loans given for business purposes, commercial mortgages as well as corporate bonds are required. One of the principal components is the credit score of the borrower, which involves, in and underwriting of the interest rates of these loans. The monthly payments or installments of the personal loan amounts vary with the payment terms. The installment amount can be increased or decreased by decreasing or increasing the period of the repayment of the loan respectively, though in both cases the overall interest has to be paid.Some of the types of personal loans and their processes are discussed in brief below:Secured loan – It is the type of loan in which the borrower has to pledge some asset as collateral like the mortgage loan in which the individuals borrowing the loan has to lien the title of the house, ( in case of house purchasing ) to the financial institution lending the money. After the repayment of the amount with interest, the bank gives the legal right to the individual to repossess the house or even sell it. The same procedure is maintained in case of car loans, auto loans etc.Unsecured loan – these types of loans do not need any security. They are available in different packages from banks, for instance in the form of bank overdraft, credit card debt and so on.Demand loans – these are short term loans that did not have any fixed date of repayment. In this case, the interest rate varies according to the Repo and reverse Repo rates.Subsidized loans – in these types of loans the interest rates are subsidized by an explicit or may be by some hidden subsidy.
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Factoring Financing – Three Things You Need to Know About Receivable Financing in Canada
You have made the decision to consider factoring financing as an overall business financing strategy. In some cases you may be factoring and receivable financing currently, but are not happy with a number of key issues that weren’t discussed when you set up your facility. Let’s explore the three things you need to know around factoring financing in Canada, and debunk some of the myths and mis information that is out there on this subject.These are:1. All factoring Companies are the same2. Factoring is expensive3. Factoring is intrusive to my customers and suppliers, but my firm has to live with thatThe reality in Canada is that as a country we came late to the factoring party. Factoring started in the U.S. and Europe, and has been established for hundreds of years. As a result the factoring that tends to dominate Canadian business financing, both in business model and pricing is heavily influenced by a small number of foreign firms.We should probably do a very short ‘primer’ on factoring to ensure we’ve got the basics in place. Factoring, or receivable financing is the sale of your invoices or accounts receivable to a third party. It is very dominant in certain industries, i.e. trucking and transportation, staffing, etc, but quite frankly is now prevalent throughout Canada in many industries. What differentiates factoring is really the three points we’ll discuss – who is offering it to you, what it costs, and how does it work.We recommend to clients that they deal with Canadian firms when considering a factoring option. Because this business financing is somewhat unique, and mis understood we strongly recommend you work with a trusted, credible, and experienced advisor in this area who can guide you through what many consider the factoring maze.So let’s get back to our three key areas: First factoring firms vary in Canada by size, geography, and financial capability. You need to align yourself with a party that is most suited to your type of business, the size of your receivables portfolio, and the ability to deal on a one on one basis on any issues that come up.As we stated, it seems common sense that your best partner will be a Canadian firm who as direct representation in your geographical area.Lets move on to point # 2 – Is factoring expensive? We always hate saying this, but the answer is that it depends. Receivable financing certainly has the aura of being expensive, and unfortunately most clients we meet are always focus on rate. A few key points need to be made, so let’s be clear on this issue. First of all factoring in Canada has a discount rate of between 1-3% per month. We use the term discount rate because the industry itself doesn’t view the rate as an interest rate; it views it as essentially a reduction in your overall gross margin. Let’s use a quick, clear example. Let’s say you have an invoice for $ 100,000.00. Factoring allows you to get approx 90% of the funds on that invoice the day you generate the invoice. (The balance, 10%, is paid to you when your customer pays,) and out of that holdback comes, say a 2% discount fee to the factor firm) the factor industry view that 2% as a commission for financing your invoice. If your customer pays in 30 days Canadian business can be forgiven by saying – I paid 2% per month, that’s 24% per annum that is expensive.One of the main points we can make when advising clients on a proper factor financing facility is that the funds you get on immediate cash conversion can be used to purchase inventory at a better price for cash, or alternatively, you can take the many 2% net ten day discounts many suppliers offer. If that was the case on all your business we can make the statement that you are recovering 100% of your financing costs via this strategy, plus you have unlimited working capital.That’s financial power.For our third and final point we address the issue of customer intrusiveness. We alluded the U.S. and U.K. firms who follow a very clear process on the receivable financing for your firm – they send your invoice to your customer on your behalf, they corresponded with the customer, and they call your customer for money.But, and this is a large ‘ but’ did you know that with proper negotiations and the use of a proper advisor you can negotiate and implement a facility that allows you to bill and collect your own receivables, while at the same time getting all the benefits of factoring – i.e. immediate working capital and cash flow?In summary, factoring can be easily mis understood.Assess what you think is wrong or might not work with this method of financing, and develop a receivables financing strategy with the knowledge that you will not be making the mistakes of others who are less and ill informed.
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