Ray Murdoch and Steve Brown – Commercial Equipment Finance Case study

Task 1 — Identify the clients’ complex broking needs

Business risk can be defined as anything that may impact the financial health of a business, or that could lead to insolvency.

The risk to a business can eventuate for a variety of reasons and can come from internal or external sources. It is your responsibility (as the broker) to understand the client’s business, potential risks, their history, experience and business performance. You will also need to understand specific aspects of the transaction such as your client’s intended goals, objectives and requirements in purchasing the equipment.

Task 1: Question 1

Prepare a list of questions that you would ask Ray and Steve in order to gather information in preparation of the loan application.

Your questions for Ray and Steve should uncover:

• their understanding of the risks and complex nature of purchasing this equipment (e.g. the risk that the investment may not meet the returns they are expecting)
• their understanding of the potential risks and benefits/returns associated with financing the equipment purchase
• identification of their tolerance of risk in relation to the purchase, damage to equipment during delivery, installation or operations. How would they mitigate these risks?
• if they have any specific product and/or product features they require
• if they want flexibility in the product to be able to pay it out early or be able to refinance
• if they would consider using their own properties as security to provide different lending options
• you need to uncover their understanding of their obligation for insurance and maintenance of the equipment etc.
• to understand the financial aspects of the transaction (i.e. total costs, installation, other potential premises modifications required to accommodate the machine etc.)
• the current financial position of the business.
• to ascertain if they have a taxation strategy in regards to the purchase of the equipment
• which other professionals will they will consult with and for what purpose?
• to understand and/or mitigate any other potential risks you have identified with their situation. For example, their experience, background, succession planning, business ownership issues.(500 words)

Task 2 — Develop complex broking options

You are required to prepare a full loan proposal addressed to Ray and Steveoutlining available loan options and the application process. The proposal must also describe the potential advantages and disadvantages of the financing option that is being recommended.

In a suitable report format, you should prepare the proposal to Ray and Steve, covering the following:

1. The parties to the loan – what names will be on the loan contract?

2. Provide two (2) different product options that would meet their needs and objectives – outline the product name/type, loan term, interest rate, balloon payment (if applicable), fees and charges and monthly repayments.

3. Provide your recommendation of the best product option to meet their needs. State why the other product was not in their best interest or the best option for them.

4. Name three (3) lenders that offer the product you recommended for their transaction. Advise them about the product type, loan terms that are available, interest rate, balloon payment (if applicable), fees and charges and monthly repayments.

5. Provide a summary of the lender’s applicable fees and charges — including set up costs and ongoing fees and charges.

6. Advise which relevant disclosures need to be made covering broker remuneration.

7. Outline all security that will be required, including directors guarantees.

8. List the documentation they need to provide to obtain the funding for the machine and to obtain a loan approval.

9. Outline their responsibilities, so they fully understand their obligations regarding the security offered and the equipment during the loan term.

10. Provide details of the financial and transaction risks associated with the new loan of which they should be made aware. For example, what would happen if they could no longer service the debt?

11. They enquired about claiming back the GST that is included in the purchase price of the machine. You also feel that they may be able to utilise ‘Small Business Asset – Instant asset write-off’ benefits. In accordance with your qualification as a mortgage broker, what should you advise them to do regarding their question on claiming back GST?

12. Invite them to ask you any questions they may have about the transaction.

13. Provide an instruction for them to advise you to proceed with the application on their behalf.

(800 words)

Notes:Any assumptions you make should be listed, and not be in conflict with the case study information already provided.

You are to write a loan proposal to your clients, demonstrating your professional writing skill — not simply commenting on each of the points detailed above.

Your proposal should be supported by evidence-based statements and not contain opinion-based commentary.

The use of tables in the report to set out some of the numeric information may be of benefit.

Use an Upfront commission at 0.66% and trail of 0.165% which includes GST

Task 3 — Implement complex loan structures

Ray and Steve have accepted your recommendations and have given you authority to proceed with their application.

As part of implementing their loan application you are required to prepare a formal written loan submission to the lender for approval.

Note: Lenders have different credit policies and submission requirements which vary from lender to lender.

Your loan submission must include:

1. the details of borrower, guarantors and all contact details

2. the borrower and key personnel’s background

3. an overview of the proposal — what the finance is for – how does it benefit the business

4. a ‘funds-to-complete’ table (cost, deposit etc.) including statutory costs and any relevant fees

5. the proposed structure of the facility being recommended — product type, loan amount, term, interest rate, repayments and residual value (if any), pricing (lender fees etc.) 

6. cash flow/serviceability calculations using NPAT averaged over two years. Include the current company loan repayments along with the annual interest on the company overdraft calculated at 80% of the limit

7. full details of the security/collateral that is to be provided and whether clients should seek independent legal advice

8. any relevant conditions of approval that the client must meet (if applicable)

9. a description of the relevant risks — industry, business, transactional, financial — and how they will be mitigated

10. a list of all documents that would be attached to the application

11. any other information that is relevant to assist the lender to provide an approval

12. your comments and recommendations.

(800 words)

Notes:Any assumptions you make should be noted, and not be in conflict with the case study information already provided.

You are to write a formal submission to the lender; not simply commenting on each of the points detailed above.

The use of tables in the report, to set out some of the numeric information, may be of benefit.

Task 4 — Verification of applicant’s financial situation

This task requires you to describe the actions that you would take to verify the applicant’s details and financial situation.

You will need to identify the key verification tasks associated with the financial situation of both individual applicants and related business activities, based on the information set out in the case study.

Task 4: Question 1

(a) Identify and list each of the individuals and/or business entities for which you would require a credit report.

(b) Name the company that you would use to access this information and explain what you require from the client, in order to gain consent to obtain this information.

(c) Part (b) requires you to obtain appropriate consent to conduct the credit check. What legislation are you complying with by obtaining consent prior to proceeding?

(d) List the information that is provided in the credit report? (Provide six (6) items)