Learning Objectives:

  • Assess working capital requirements for businesses.

  • Evaluate term loan proposals.

  • Understand asset-based lending facilities.

5.1 Working Capital Assessment

Working capital financing is a critical area of commercial lending. Banks assess a company’s working capital needs based on its operating cycle and the cash conversion cycle . Working capital loans are used to finance day-to-day operations such as inventory, accounts receivable, and operating expenses .

The assessment involves analysing the company’s current assets and liabilities to determine the appropriate level of funding. This includes evaluating the quality of accounts receivable and inventory . Asset-based lending facilities are used to finance working capital, with special emphasis placed on the valuation of collateral, the collection of credit information, and its analysis .

5.2 Term Loan Assessment

Term loans are used for capital expenditures such as purchasing equipment or property . Assessment involves analysing projected cash flows, capital expenditure plans, and the economic life of the asset being financed. The loan’s term should match the useful life of the asset .

5.3 Specialised Lending Products

Commercial lending includes various specialised products. Letters of credit and PIK (Payment-in-Kind) facilities are examples of advanced lending structures . Banks also need to understand syndicated loans, bilateral arrangements, and other credit facilities offered to corporate customers .

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