Prepared By:

 ALI AHMED (FA17-MBAP-0010)

 RAFIA TAHIR (FA17-MBAP-0096)
 EMANUEL BERNARD (FA17-MBAP-00
Contents
Introduction.................................................................................................................................................1
Short-term vs. long-term business financing...............................................................................................1
Short-term vs. long-term business financing amounts........................................................................2
Traditional short-term business financing options......................................................................................2
Not-so-traditional short-term business financing options.......................................................................2
Benefits of online short-term business financing........................................................................................3
Business finance..........................................................................................................................................3
Short-Term Financial operations.................................................................................................................4
Financial planning and control.............................................................................................................4
Financial ratio analysis.........................................................................................................................4
Financial forecasting............................................................................................................................5
Sources of Short Term Financing.................................................................................................................6
Trade Credit.........................................................................................................................................6
Commercial bank loans.......................................................................................................................9
How a Commercial Loan Works...........................................................................................................9
Securing a Commercial Loan..............................................................................................................10
Special Considerations for Commercial Loans...................................................................................10
Commercial paper.............................................................................................................................10
Secured loans....................................................................................................................................11
Intermediate-term financing.............................................................................................................11
Term loans.........................................................................................................................................12
Conditional sales contracts................................................................................................................12
Lease financing..................................................................................................................................12
Financing Lease..................................................................................................................................13
Financing Lease Explanation..............................................................................................................13
Financing Lease Example...................................................................................................................14
Real Case Example of A Firm Availing Short Term Financing Facility from Bank........................................15
Request for Revolving Credit/Revolving Finance Facility...........................................................................15
CALCULATION............................................................................................................................................17
Solution for Calculation of Actual cost of this Short term Bank Borrowing.......................................18
INTENTIONALLY LEFT BLANK
Introduction

Short term finance refers to financing needs for a small period normally less than a year. In
businesses, it is also known as working capital financing. This type of financing is normally
needed because of uneven flow of cash into the business, the seasonal pattern of business, etc. In
most cases, it is used to finance all types of inventory, accounts receivables etc. At times, only
specific one time orders of business are financed.

Financing is a very important part of every business. Firms often need financing to pay for their
assets, equipment, and other important items. Financing can be either long-term or short-term.
As is obvious, long-term financing is more expensive as compared to short-term financing.

There are different vehicles through which long-term and short-term financing is made
available. This chapter deals with the major vehicles of both types of financing.

The common sources of financing are capital that is generated by the firm itself and sometimes,
it is capital from external funders, which is usually obtained after issuance of new debt and
equity.

A firm’s management is responsible for matching the long-term or short-term financing mix.
This mix is applicable to the assets that are to be financed as closely as possible, regarding
timing and cash flows.

Short-term vs. long-term business financing

As their names imply, the primary difference between short-term and long-term business
financing is how long you have to pay back the loan. Typically, long-term lending options are

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 paid back over a number of years, while short-term lending options are paid back over a period
of months or as little as two years.

Your choice of short-term vs. long-term financing will also be determined by:

 The amount you need to borrow.

 How quickly you need the funds.

 The type of lender you’ll borrow from.

 The type of collateral you’ll provide.

 Your business’ overall financial health

Short-term vs. long-term business financing amounts

Short-term business financing options are for smaller amounts while long-term financing options
are for larger amounts. Because short-term financing is for smaller amounts, you pay them back
more quickly at a higher interest rate and there’s a shorter approval process. As long-term
business financing options are for larger amounts, there’s a longer, more rigorous approval
process and it takes more time to pay them back. However, the interest rate is lower than with a
short-term loan.

Traditional short-term business financing options

A line of credit is different than a loan as it sets up a pre-determined amount that you can draw
from whenever you need. A business credit card is also another more traditional short-term
business financing option.

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Because loans, lines of credit and credit cards are more popular, they also require a more in-
depth application process and proof of a stable payment and financial history. In other words,
business has to have a solid credit history and financial track record.
Payment history for loans, lines of credit and credit cards will also be recorded in your credit
history. As will any applications for these forms of financing.

Not-so-traditional short-term business financing options

While invoice factoring and invoice financing have both been around since the first bazaars
opened in ancient Mesopotamia, many businesses owners don’t even know these options exist.
Invoice factoring and financing let businesses who have incoming cash flow tied up in
outstanding invoices use these invoices to access short-term funding quickly and easily. While
banks don’t offer this type of asset-based financing, online lenders do. In fact, this type of
lending is now a multi-trillion-dollar industry.
Similar to invoice-based lending, there are similarly structured short-term financing options that
let businesses use their inventory or retail sales as collateral. (A little research can take you a
long way in identifying your options.)

Benefits of online short-term business financing

With online financing, such as invoice factoring, businesses don’t have to go through a lengthy
application process as they would with a traditional lender. The primary criteria are the invoice,
the customer’s payment history and the business’ risk profile.
As a result, the approval process is much quicker and once the business has established a
relationship with the lender, the turnaround times can be even faster.

Business finance

The raising and managing of funds by business organizations. Planning, analysis, and control
operations are responsibilities of the financial manager, who is usually close to the top of the
organizational structure of a firm. In very large firms, major financial decisions are often made
by a finance committee. In small firms, the owner-manager usually conducts the financial

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operations. Much of the day-to-day work of business finance is conducted by lower-level staff;
their work includes handling cash receipts and disbursements, borrowing from commercial banks
on a regular and continuing basis, and formulating cash budgets.

Financial decisions affect both the profitability and the risk of a firm’s operations. An increase in
cash holdings, for instance, reduces risk; but, because cash is not an earning asset, converting
other types of assets to cash reduces the firm’s profitability. Similarly, the use of additional debt
can raise the profitability of a firm (because it is expanding its business with borrowed money),
but more debt means more risk. Striking a balance between risk and profitability that will
maintain the long-term value of a firm’s securities is the task of finance.

Short-Term Financial operations

Financial planning and control

Short-term financial operations are closely involved with the financial planning and control
activities of a firm. These include financial ratio analysis, profit planning, financial forecasting,
and budgeting.

Financial ratio analysis

A firm’s balance sheet contains many items that, taken by themselves, have no clear meaning.
Financial ratio analysis is a way of appraising their relative importance. The ratio of
current assets to current liabilities, for example, gives the analyst an idea of the extent to which
the firm can meet its current obligations. This is known as a liquidity ratio. Financial leverage
ratios (such as the debt–asset ratio and debt as a percentage of total capitalization) are used to
make judgments about the advantages to be gained from raising funds by the issuance
of bonds (debt) rather than stock. Activity ratios, relating to the turnover of such asset categories
as inventories, accounts receivable, and fixed assets, show how intensively a firm is employing

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its assets. A firm’s primary operating objective is to earn a good return on its invested capital,
and various profit ratios (profits as a percentage of sales, of assets, or of net worth) show how
successfully it is meeting this objective.

Ratio analysis is used to compare a firm’s performance with that of other firms in the same
industry or with the performance of industry in general. It is also used to study trends in the
firm’s performance over time and thus to anticipate problems before they develop profit
planning.

Ratio analysis applies to a firm’s current operating posture. But a firm must also plan for future
growth. This requires decisions as to the expansion of existing operations and, in manufacturing,
to the development of new product lines. A firm must choose between productive processes
requiring various degrees of mechanization or automation—that is, various amounts of fixed
capital in the form of machinery and equipment. This will increase fixed costs (costs that are
relatively constant and do not decrease when the firm is operating at levels below full capacity).
The higher the proportion of fixed costs to total costs, the higher must be the level of operation
before profits begin, and the more sensitive profits will be to changes in the level of operation

Financial forecasting

The financial manager must also make overall forecasts of future capital requirements to ensure
that funds will be available to finance new investment programs. The first step in making such a
forecast is to obtain an estimate of sales during each year of the planning period. This estimate is
worked out jointly by the marketing, production, and finance departments: the marketing
manager estimates demand; the production manager estimates capacity; and the financial
manager estimates availability of funds to finance new accounts receivable, inventories, and
fixed assets.
For the predicted level of sales, the financial manager estimates the funds that will be available
from the company’s operations and compares this amount with what will be needed to pay for
the new fixed assets (machinery, equipment, etc.). If the growth rate exceeds 1o percent a year,
asset requirements are likely to exceed internal sources of funds, so plans must be made to

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finance them by issuing securities. If, on the other hand, growth is slow, more funds will be
generated than are required to support the estimated growth in sales. In this case, the financial
manager will consider a number of alternatives, including increasing dividends to stockholders,
retiring debt, using excess funds to acquire other firms, or, perhaps, increasing expenditures
on research and development.
Budgeting

once a firm’s general goals for the planning period have been established, the next step is to set
up a detailed plan of operation—the budget. A complete budget system encompasses all aspects
of the firm’s operations over the planning period. It may even allow for changes in plans as
required by factors outside the firm’s control.
Budgeting is a part of the total planning activity of the firm, so it must begin with a statement of
the firm’s long-range plan. This plan includes a long-range sales forecast, which requires a
determination of the number and types of products to be manufactured in the
years encompassed by the long-range plan. Short-term budgets are formulated within the
framework of the long-range plan. Normally, there is a budget for every individual product and
for every significant activity of the firm.

Establishing budgetary controls requires a realistic understanding of the firm’s activities. For
example, a small firm purchases more parts and uses more labour and less machinery; a larger
firm will buy raw materials and use machinery to manufacture end items. In consequence, the
smaller firm should budget higher parts and labour cost ratios, while the larger firm should
budget higher overhead cost ratios and larger investments in fixed assets. If standards are
unrealistically high, frustrations and resentment will develop. If standards are unduly lax, costs
will be out of control, profits will suffer, and employee morale will drop.

Sources of Short Term Financing

The main sources of short-term financing are (1) trade credit, (2) commercial bank loans, (3)
commercial paper, a specific type of promissory note, and (4) secured loans.

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Trade Credit

A firm customarily buys its supplies and materials on credit from other firms, recording the debt
as an account payable. This trade credit, as it is commonly called, is the largest single category of
short-term credit. Credit terms are usually expressed with a discount for prompt payment. Thus,
the seller may state that if payment is made within 1o days of the invoice date, a 2 percent cash
discount will be allowed. If the cash discount is not taken, payment is due 3o days after the date
of invoice. The cost of not taking cash discounts is the price of the credit.

For many businesses, trade credit is an essential tool for financing growth. Trade credit is the
credit extended to you by suppliers who let you buy now and pay later. Any time you take
delivery of materials, equipment or other valuables without paying cash on the spot, you're using
trade credit.

When you're first starting your business, however, suppliers most likely aren't going to offer you
trade credit. They're going to want to make every order c.o.d. (cash or check on delivery) or paid
by credit card in advance until you've established that you can pay your bills on time. While this
is a fairly normal practice, you can still try and negotiate trade credit with suppliers. one of the
things that will help you in these negotiations is a properly prepared financial plan.

When you visit your supplier to set up your order during your startup period, ask to speak
directly to the owner of the business if it's a small company. If it's a larger business, ask to speak
to the CFo or any other person who approves credit. Introduce yourself. Show the officer the
financial plan you've prepared. Tell the owner or financial officer about your business, and
explain that you need to get your first orders on credit in order to launch your venture.

Depending on the terms available from your suppliers, the cost of trade credit can be quite high.
For example, assume you make a purchase from a supplier who decides to extend credit to you.
The terms the supplier offers you are two-percent cash discount with 1o days and a net date of 3o
days. Essentially, the suppliers is saying that if you pay within 1o days, the purchase price will
be discounted by two percent. on the other hand, by forfeiting the two-percent discount, you're

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able to use your money for 2o more days. on an annualized basis, this is actually costing you 36
percent of the total cost of the items you are purchasing from this supplier! (36o ( 2o days = 18
times per year without discount; 18 ( 2 percent discount = 36 percent discount missed.)

Cash discounts aren't the only factor you have to consider in the equation. There are also late-
payment or delinquency penalties should you extend payment beyond the agreed-upon terms.
These can usually run between one and two percent on a monthly basis. If you miss your net
payment date for an entire year, that can cost you as much as 12 to 24 percent in penalty interest.

Effective use of trade credit requires intelligent planning to avoid unnecessary costs through
forfeiture of cash discounts or the incurring of delinquency penalties. But every business should
take full advantage of trade that is available without additional cost in order to reduce its need for
capital from other sources.

When you visit your supplier to set up your order during your startup period, ask to speak
directly to the owner of the business if it's a small company. If it's a larger business, ask to speak
to the CFo or any other person who approves credit. Introduce yourself. Show the officer the
financial plan you've prepared. Tell the owner or financial officer about your business, and
explain that you need to get your first orders on credit in order to launch your venture.

Depending on the terms available from your suppliers, the cost of trade credit can be quite high.
For example, assume you make a purchase from a supplier who decides to extend credit to you.
The terms the supplier offers you are two-percent cash discount with 1o days and a net date of 3o
days. Essentially, the suppliers is saying that if you pay within 1o days, the purchase price will
be discounted by two percent. on the other hand, by forfeiting the two-percent discount, you're
able to use your money for 2o more days. on an annualized basis, this is actually costing you 36
percent of the total cost of the items you are purchasing from this supplier! (36o ( 2o days = 18
times per year without discount; 18 ( 2 percent discount = 36 percent discount missed.)

Cash discounts aren't the only factor you have to consider in the equation. There are also late-
payment or delinquency penalties should you extend payment beyond the agreed-upon terms.
These can usually run between one and two percent on a monthly basis. If you miss your net
payment date for an entire year, that can cost you as much as 12 to 24 percent in penalty interest.

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Effective use of trade credit requires intelligent planning to avoid unnecessary costs through
forfeiture of cash discounts or the incurring of delinquency penalties. But every business should
take full advantage of trade that is available without additional cost in order to reduce its need for
capital from other sources.

Commercial bank loans

Commercial bank lending appears on the balance sheet as notes payable and is second in

importance to trade credit as a source of short-term financing. Banks occupy a pivotal position in
the short-term and intermediate-term money markets. As a firm’s financing needs grow, banks
are called upon to provide additional funds. A single loan obtained from a bank by a business
firm is not different in principle from a loan obtained by an individual. The firm signs a
conventional promissory note. Repayment is made in a lump sum at maturity or in installments
throughout the life of the loan. A line of credit, as distinguished from a single loan, is a formal or
informal understanding between the bank and the borrower as to the maximum loan balance the
bank will allow at any one time.

How a Commercial Loan Works

Commercial loans are granted to a variety of business entities, usually to assist with short-term
funding needs for operational costs or for the purchase of equipment to facilitate the operating
process. In some instances, the loan may be extended to help the business meet more basic
operational needs, such as funding for payroll or to purchase supplies used in the production and
manufacturing process.

These loans often require that a business post collateral, usually in the form of property, plant or
equipment that the bank can confiscate from the borrower in the event of default or bankruptcy.
Sometimes cash flows generated from future accounts receivable are used as a loan's collateral.
Mortgages issued to commercial real estate are one form of commercial loan.

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Securing a Commercial Loan

As is true for nearly every type of loan, how creditworthy an applicant is plays a starring role
when a financial institution considers giving out a commercial loan. In most cases, the business
applying for the loan will be required to present documentation – generally in the form of
balance sheets and other similar documents – that proves the company has a favorable and
consistent cash flow. This assures the lender that the loan can and will be repaid according to its
terms.

If a company is approved for a commercial loan, it can expect to pay a rate of interest that falls in
line with the prime lending rate at the time the loan is issued. Banks typically require monthly
financial statements from the company through the duration of the loan and often require the
company to take out insurance on any larger items purchased with funds from the loan.

Special Considerations for Commercial Loans

While a commercial loan is most often thought of as a short-term source of funds for a business,
there are some banks or other financial institutions that offer renewable loans that can extend
indefinitely. This allows the business to get the funds it needs to maintain ongoing operations
and to repay the first loan within its specified time period.

Commercial paper

Commercial paper, a third source of short-term credit, consists of well-established

firms’ promissory notes sold primarily to other businesses, insurance companies, pension funds,
and banks. Commercial paper is issued for periods varying from two to six months. The rates on

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prime commercial paper vary, but they are generally slightly below the rates paid on prime
business loans.

A basic limitation of the commercial-paper market is that its resources are limited to the excess
liquidity that corporations, the main suppliers of funds, may have at any particular time. Another
disadvantage is the impersonality of the dealings; a bank is much more likely to help a good
customer weather a storm than is a commercial-paper dealer.

Secured loans

Most short-term business loans are unsecured, which means that an established company’s credit
rating qualifies it for a loan. It is ordinarily better to borrow on an unsecured basis, but frequently
a borrower’s credit rating is not strong enough to justify an unsecured loan. The most common
types of collateral used for short-term credit are accounts receivable and inventories.

Financing through accounts receivable can be done either by pledging the receivables or by
selling them outright, a process called factoring in the United States. When a receivable is
pledged, the borrower retains the risk that the person or firm that owes the receivable will not
pay; this risk is typically passed on to the lender when factoring is involved.

When loans are secured by inventory, the lender takes title to them. He may or may not take
physical possession of them. Under a field warehousing arrangement, the inventory is under the
physical control of a warehouse company, which releases the inventory only on order from the
lending institution. Canned goods, lumber, steel, coal, and other standardized products are the
types of goods usually covered in field warehouse arrangements.

Intermediate-term financing
Whereas short-term loans are repaid in a period of weeks or months, intermediate-term loans are
scheduled for repayment in 1 to 15 years. obligations due in 15 or more years are thought of as
long-term debt. The major forms of intermediate-term financing include (1) term loans, (2)
conditional sales contracts, and (3) lease financing.

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Term loans

A term loan is a business credit with a maturity of more than 1 year but less than 15 years.
Usually the term loan is retired by systematic repayments (amortization payments) over its life.
It may be secured by a chattel mortgage on equipment, but larger, stronger companies are able to
borrow on an unsecured basis. Commercial banks and life insurance companies are the principal
suppliers of term loans. The interest cost of term loans varies with the size of the loan and the
strength of the borrower.

Term loans involve more risk to the lender than do short-term loans. The lending institution’s
funds are tied up for a long period, and during this time the borrower’s situation can change
markedly. To protect themselves, lenders often include in the loan agreement stipulations that the
borrowing company maintain its current liquidity ratio at a specified level, limit its acquisitions
of fixed assets, keep its debt ratio below a stated amount, and in general follow policies that are
acceptable to the lending institution.

Conditional sales contracts

Conditional sales contracts represent a common method of obtaining equipment by agreeing to
pay for it in installments over a period of up to five years. The seller of the equipment continues
to hold title to the equipment until payment has been completed.

Lease financing

It is not necessary to purchase assets in order to use them. Railroad and airline companies in the
United States, for instance, have acquired much of their equipment by leasing it. Whether leasing
is advantageous depends aside from tax advantages on the firm’s access to funds. Leasing
provides an alternative method of financing. A lease contract, however, being a fixed obligation,
is similar to debt and uses some of the firm’s debt-carrying ability. It is generally advantageous
for a firm to own its land and buildings, because their value is likely to increase, but the same
possibility of appreciation does not apply to equipment.

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The statement is frequently made that leasing involves higher interest rates than other forms of
financing, but this need not always be true. Much depends on the firm’s standing as a credit risk.
Moreover, it is difficult to separate the cash costs of leasing from the other services that may be
embodied in a leasing contract. If the leasing company can perform nonfinancial services (such
as maintenance of the equipment) at a lower cost than the lessee or someone else could perform
them, the effective cost of leasing may be lower than other financing methods.

Although leasing involves fixed charges, it enables a firm to present lower debt-to-asset ratios in
its financial statements. Many lenders, in examining financial statements, give less weight to a
lease obligation than to a loan obligation.

Financing Lease

The financing lease definition, also known as a capital lease, is a method of deferred payment. If

the lessee is willing to pay the additional cost of interest, then they can use a financing lease to
pay off a capital investment over time rather than all at once. Different from an operating lease, a
company who uses a financing lease gains ownership of the item when the lease period is over.
Generally, they have to pay a final balloon payment which is less than the fair market value of
the item if it was new.

Financing Lease Explanation

A financing lease, explained simply as lease-to-own, has many benefits. First, it allows the
interested party to use a deferred payment schedule on a necessary tool. This has been explained
above.
other benefits of a financing lease make it a more attractive option. To begin, the lessee may still
gain the benefit of depreciation, thus saving money on taxes. This is a benefit which makes
a financing lease more appealing than an operating lease. The cost of this is that a financing lease
can only write off the expense of interest payments rather than principal. Insurance premiums,

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repair costs, and taxes are incurred by the lessee rather than the lesser. Additionally, they claim
the risk of ownership on the item.
Another benefit is that this type of lease allows the purchasing party to own the item at the end of
the agreement, making the lease an effective investment rather than a cost of doing business.
Many financing leases allow the purchaser to receive the item whenever they want by paying off
the final principal value in one lump sum.

For a financing lease accounting to run smoothly, a few standards must exist. ownership of the
item at the end of the lease term and purchase choice form the first two. Next, the length of the
lease must be 3/4 the economic life of the item. Finally, the lease payments must comprise at
least 9o% of the cost of the item if it was purchased instead of leasing. These traits make
a financing lease a unique tool for a customer who wants a tool, wants to
receive vendor financing, wants to gain ownership of the item, and wants flexible terms in all of
this.

Financing Lease Example

Devin has created a new soda company. Modeled after the tradition of Italian Sodas, Devin
believes the US market would love to try his tasty beverage. He appears to be succeeding from
his initial efforts of marketing and selling his product.

Now, Devin must expand his business. To do this, he will need a larger bottling machine. Devin
wants the equipment but also wants to reserve the cash he has for expansion. He
expects growth but currently, from his planning of company finances, only has so much to spend.
Devin decides on a direct financing lease with the equipment provider. Here, he can have and
work towards owning the item as soon as possible. He likes the terms his vendor provides
on financing, especially that he can pay off the item if he sees more success than he expected.
This is known as a financing lease buyout.

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In this agreement, Devin negotiates the total price, interest rate, principal and interest payment
schedule, and any associated penalties and fees. Devin is able to find a great deal on the item and
completes the contract. He knows that by financing the item he will pay a little more, but overall
appreciates his decision. It will help create the success he has envisioned.

Real Case Example of A Firm Availing Short Term Financing Facility from
Bank

Request for Short Term Finance Facility by Rehmat Broker who deals in Rice Broken , Wheat
and all kinds of grain. Rehmat Broker requested Bank AL Habib Ltd. For Short Term finance
Facility for up to Rs. 10 Million to meet their working capital requirements. As a Security they
will provide property document of Bridge View Apartments for mortgage purpose whose Market
value as per valuation report is Rs. 14 Million.

In the reference of above request Bank AL Habib Started Reviewing the documents and
necessary process for response on credit facility of their customer. After reviewing the mortgage
property and financial statements of Rehmat Broker, Bank AL Habib Ltd stated some
conditions to the company subject to which approval will be granted for the following finance
facility.

Request for Revolving Credit/Revolving Finance Facility:

a). Purpose: For Working Capital Requirements.

b). Facility/Loan : Rs. 10,000,000/- (Rupees Ten Million Only).

Interest Rate: KIBOR (ASK) +3% P.A= 10.53+3=13.53% P.A.

c). Pricing:

I. The mark up/pricing for the above facility is 3 months Avg. KIBOR Ask Prevailing on
the date of disbursement (the KIBOR Rate) plus 3% per annum, the KIBOR Rate shall be
reviewed on first working day of the calendar quarter on the basis of Prevailing 3 Month
Avg. KIBOR Ask.

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 II. The mark-up component of the purchase price shall be payable in arrears on a calendar
quarterly basis and the KIBOR Rate shall be revised on a calendar quarterly basis . The
KIBOR RATE shall be fixed for the first applicable calendar quarter on the date of the
disbursement of the facility for the mark-up component due at the end of the said first
calendar quarter. For subsequent calendar quarters, the KIBOR RATE shall be re-set on
the first business day of a calendar quarter for the markup component due at the end of
the calendar quarter.

III. The purchase price in the financing agreement shall be calculated at an assumed rate of
20 percent per annum (Assumed Rate). The Bank shall grant an adjustment in the amount
of markup component of an installment of the Purchase Price which shall comprise of the
difference between the Assumed Rate and the Base Price.

IV. All calculations for the purposes of the grant of the adjustment and installments of the
Purchase Price shall be on the basis of the daily outstanding Sale Price and 365 day year.

SECURITIES:

i) Hypothecation charge over receivable for Rs.12.00 Million with 10% margin.
ii) Personal Guarantee of Mr.Kelash Kumar –Proprietor & Property Owner for
Rs16.900Mn.
iii) Equitable /Token Registered Mortgage over Residential Property bearing Flat No. C-
202/5,
2nd Floor, Bridge View Apartment near Frere Town, Karachi, in the name of Mr.
Kelash Kumar, measuring 103.00 Sq yds. Having MKV Rs.14.0 Million & FSV Rs
11.90 Million ( As per valuation report M/s Indus Surveyor (Pvt) Ltd dated
06.09.2018).

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 SNO Documents required with Credit Proposal
   
  MANDATORY DOCUMENTS TO BE ATTACHED
1 Turn around Time Sheet
2 Basic Information Sheet (BIS)
3 Approval Form (AF-1)
4 Security Sheet/ Statistical Information Sheet
5 Financial Spread
6 Extract from SBP e-CIB
7 Group Summary Sheet
8 Copy of Borrowers Basic Fact Sheet as per Prudential Regulations
9 Latest Audited Financial Statement /Management Accounts
10 Search Report
11 Copy of Customer Request Letter
12 Internal Risk Rating Sheet (ORR & FRR)
13 Visit Report
14 Future Cash Flow in case of SE & ME
15 Loan Application Form (LAF) In case of SE & ME
  PRUDENTIAL /CPM COMPLIANCE STATUS
16 Per Party Exposure (R-1) (Fund Based) (i.e. 25% of Bank Equity) is
complied
17 Per Party Exposure (R-1) (FB + NFB) (i.e. 25% of Bank Equity) is
complied
18 Per Group Exposure (R-1) (Fund Based) (i.e. 25% of Bank Equity) is
complied
19 Per Group Exposure (R-1) (FB + NFB) (i.e. 25% of Bank Equity) is
complied

CALCULATION

As Based on the above Case Study Rehmat Broker Needs to Increase its working Capital by 10
Million and for this purpose it requested from Bank AL Habib a short term borrowing 13.53%
P.A. and Bank Requires a Compensating Balance of 10% along with other Securities (for loan
backup and service) as described above in the case.

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Solution for Calculation of Actual cost of this Short term Bank Borrowing

DATA
Loan 10,000,000
Annual Interest Rate 13.53%
Compensating Balance 10%

CALCULATION FOR ACTUAL LOAN

Actual Loan 10,000,000/76.47% =
13,077,023.67
Interest= Actual loan x Interest Rate 13,077,023.67 x 13.53%=
1,769,321.30
Compensating Balance= Actual Loan x %age of Compensating 13,077,023.67 x 10%=
Balance 1,307,702.37

DISCOUNT INTEREST METHOD (FORMULA)

DIM= INTEREST + OTHER X 360/NO. OF DAYS
COST/ACTUAL LOAN-INTERST- LOAN BORROWED
COMPENSATING BALANCE

DISCOUNT INTEREST METHOD (CALCULATION)

DIM= 1,769,321.30+0/13,077,023.67-1,769,321.30- X 360/360
1,307,702.37

DISCOUNT INTEREST METHOD = 17.69%

Hence, the actual cost of loan which Rehmat Broker have to bear is 17.69%.

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