Capital market

Chapter 1

Courtyard of the Amsterdam Stock Exchange (Beurs van Hendrick de Keyser in Dutch), the
foremost centre of European capital markets in the 17th century. The Dutch were the first in
history to use a fully-fledged capital market (including the bond market and stock market) to
finance publicly traded companies.

The trading floor of the New York Stock Exchange, one of the largest secondary capital
markets in the world. Most of the trades on the New York Stock Exchange are executed
electronically, but its hybrid structure allows some trading to be done face to face on the floor.

Capital Market is a financial market in which long-term debt (over a year) or equity-
backed securities are bought and sold. Capital markets channel the wealth of savers to those
who can put it to long-term productive use, such as companies or governments making long-
term investments. Financial regulators like the Bank of England (BoE) and the U.S. Securities
and Exchange Commission (SEC) oversee capital markets to protect investors against fraud,
among other duties.
Modern capital markets are almost invariably hosted on computer-based electronic
trading platforms; most can be accessed only by entities within the financial sector or the
treasury departments of governments and corporations, but some can be accessed directly by
the public.
A capital market can be either a primary market or a secondary market. In primary market,
new stock or bond issues are sold to investors, often via a mechanism known as underwriting.
The main entities seeking to raise long-term funds on the primary capital markets are
governments (which may be municipal, local or national) and business enterprises (companies).
Governments issue only bonds, whereas companies often issue both equity and bonds.
The main entities purchasing the bonds or stock include pension funds, hedge
funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks
trading on their own behalf.
In the secondary market, existing securities are sold and bought among investors or
traders, usually on an exchange, over-the-counter, or elsewhere. The existence of
secondary markets increases the willingness of investors in primary markets, as they know they
are likely to be able to swiftly cash out their investments if the need arises.
A second important division falls between the stock markets (for equity securities, also
known as shares, where investors acquire ownership of companies) and the bond
markets (where investors become creditors).
Versus money markets
The money markets are used for the raising of short-term finance, sometimes for loans
that are expected to be paid back as early as overnight. In contrast, the "capital markets" are
used for the raising of long-term finance, such as the purchase of shares/equities, or for loans
that are not expected to be fully paid back for at least a year.
Funds borrowed from money markets are typically used for general operating expenses, to
provide liquid assets for brief periods.
For example, a company may have inbound payments from customers that have not yet
cleared, but need immediate cash to pay its employees. When a company borrows from the
primary capital markets, often the purpose is to invest in additional physical capital goods,
which will be used to help increase its income. It can take many months or years before the
investment generates sufficient return to pay back its cost, and hence the finance is long term.
Together, money markets and capital markets form the financial markets, as the term is
narrowly understood.[b] The capital market is concerned with long-term finance. In the widest
sense, it consists of a series of channels through which the savings of the community are made
available for industrial and commercial enterprises and public authorities.
Versus bank loans
Regular bank lending is not usually classed as a capital market transaction, even when
loans are extended for a period longer than a year.
First, regular bank loans are not securitized (i.e. they do not take the form of a
resaleable security like a share or bond that can be traded on the markets).
Second, lending from banks is more heavily regulated than capital market lending.
Third, bank depositors tend to be more risk-averse than capital market investors. These
three differences all act to limit institutional lending as a source of finance.
Two additional differences, this time favoring lending by banks, are that banks are
more accessible for small and medium-sized companies, and that they have the ability to create
money as they lend. In the 20th century, most company finance apart from share issues was
raised by bank loans.
But since about 1980 there has been an ongoing trend for disintermediation, where
large and creditworthy companies have found they effectively have to pay out less interest if
they borrow directly from capital markets rather than from banks.
Government on primary market
When a government wants to raise long-term finance it will often sell bonds in the
capital markets. In the 20th and early 21st centuries, many governments would use investment
banks to organize the sale of their bonds. The leading bank would underwrite the bonds, and
would often head up a syndicate of brokers, some of whom might be based in other investment
banks. The syndicate would then sell to various investors.
For developing countries, a multilateral development bank would sometimes provide an
additional layer of underwriting, resulting in risk being shared between the investment bank(s),
the multilateral organization, and the end investors.
However, since 1997 it has been increasingly common for governments of the larger
nations to bypass investment banks by making their bonds directly available for purchase
online. Many governments now sell most of their bonds by computerized auction.
 Typically, large volumes are put up for sale in one go; a government may only hold a
small number of auctions each year. Some governments will also sell a continuous stream of
bonds through other channels.
The biggest single seller of debt is the U.S. government; there are usually several
transactions for such sales every second, which corresponds to the continuous updating of the
U.S. real-time debt clock.
Company on primary markets
When a company wants to raise money for long-term investment, one of its first
decisions is whether to do so by issuing bonds or shares. If it chooses shares, it avoids
increasing its debt, and in some cases the new shareholders may also provide non-monetary
help, such as expertise or useful contacts.
On the other hand, a new issue of shares will dilute the ownership rights of the existing
shareholders, and if they gain a controlling interest, the new shareholders may even replace
senior managers. From an investor's point of view, shares offer the potential for higher returns
and capital gains if the company does well.
Conversely, bonds are safer if the company does poorly, as they are less prone to severe
falls in price, and in the event of bankruptcy, bond owners may be paid something, while
shareholders will receive nothing.
When a company raises finance from the primary market, the process is more likely to
involve face-to-face meetings than other capital market transactions. Whether they choose to
issue bonds or shares, companies will typically enlist the services of an investment bank to
mediate between themselves and the market. A team from the investment bank often meets
with the company's senior managers to ensure their plans are sound. The bank then acts as
an underwriter, and will arrange for a network of brokers to sell the bonds or shares to
investors.
This second stage is usually done mostly through computerized systems, though
brokers will often phone up their favored clients to advise them of the opportunity. Companies
can avoid paying fees to investment banks by using a direct public offering, though this is not a
common practice as it incurs other legal costs and can take up considerable management time.
Secondary market trading
Most capital market transactions take place on the secondary market. On the primary
market, each security can be sold only once, and the process to create batches of new shares or
bonds is often lengthy due to regulatory requirements.
On the secondary markets, there is no limit to the number of times a security can be
traded, and the process is usually very quick. With the rise of strategies such as high-frequency
trading, a single security could in theory be traded thousands of times within a single hour.
Transactions on the secondary market do not directly raise finance, but they do make it
easier for companies and governments to raise finance on the primary market, as investors
know that if they want to get their money back quickly, they will usually be easily able to re-
sell their securities.
 Sometimes, however, secondary capital market transactions can have a negative effect
on the primary borrowers: for example, if a large proportion of investors try to sell their bonds,
this can push up the yields for future issues from the same entity.
There are several ways to invest in the secondary market without directly buying shares or
bonds. A common method is to invest in mutual funds or exchange-traded funds. It is also
possible to buy and sell derivatives that are based on the secondary market; one of the most
common type of these is contracts for difference – these can provide rapid profits, but can also
cause buyers to lose more money than they originally invested.
Forecasting and analyses
A great deal of work goes into analysing capital markets and predicting their future
movements. This includes academic study; work from within the financial industry for the
purposes of making money and reducing risk; and work by governments and multilateral
institutions for the purposes of regulation and understanding the impact of capital markets on
the wider economy. Methods range from the gut instincts of experienced traders, to various
forms of stochastic calculus and algorithms such as Stratonovich-Kalman-Bucy filtering
algorithm.

Capital controls
Capital controls are measures imposed by a state's government aimed at
managing capital account transactions – in other words, capital market transactions where one
of the counter-parties[g] involved is in a foreign country.
Whereas domestic regulatory authorities try to ensure that capital market participants
trade fairly with each other, and sometimes to ensure institutions like banks do not take
excessive risks, capital controls aim to ensure that the macroeconomiceffects of the capital
markets do not have a negative impact.
Most advanced nations like to use capital controls sparingly if at all, as in theory
allowing markets freedom is a win-win situation for all involved: investors are free to seek
maximum returns, and countries can benefit from investments that will develop their industry
and infrastructure.
However, sometimes capital market transactions can have a net negative effect: for
example, in a financial crisis, there can be a mass withdrawal of capital, leaving a nation without
sufficient foreign-exchange reserves to pay for needed imports. On the other hand, if too much
capital is flowing into a country, it can increase inflation and the value of the nation's currency,
making its exports uncompetitive. Countries like India employ capital controls to ensure that
their citizens' money is invested at home rather than abroad.
Financial services are the economic services provided by the finance industry, which
encompasses a broad range of businesses that manage money, including credit
unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-
financecompanies, stock brokerages, investment funds, individual managers and
some government-sponsored enterprises.
Financial services companies are present in all economically developed geographic
locations and tend to cluster in local, national, regional and international ..
History
The term "financial services" became more prevalent in the United States partly as a
result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of
companies operating in the U.S. financial services industry at that time to merge.
Companies usually have two distinct approaches to this new type of business.
One approach would be a bank which simply buys an insurance company or
an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to
its holding company simply to diversify its earnings. Outside the U.S. (e.g. Japan), non-financial
services companies are permitted within the holding company. In this scenario, each company
still looks independent, and has its own customers, etc.
In the other style, a bank would simply create its own brokerage division or insurance
division and attempt to sell those products to its own existing customers, with incentives for
combining all things with one company.

Banks
Commercial banking services
A commercial bank is what is commonly referred to as simply a bank. The term
"commercial" is used to distinguish it from an investment bank, a type of financial services
entity which instead of lending money directly to a business, helps businesses raise money from
other firms in the form of bonds (debt) or stock (equity).
The primary operations of commercial banks include:

 Keeping money safe while also allowing withdrawals when needed

 Issuance of chequebooks so that bills can be paid and other kinds of payments can be
delivered by the post.
 Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase
a home, property or business)
 Issuance of credit cards and processing of credit card transactions and billing
 Issuance of debit cards for use as a substitute for cheques
 Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)
 Provide wire transfers of funds and Electronic fund transfers between banks
 Facilitation of standing orders and direct debits, so payments for bills can be made
automatically
 Provide overdraft agreements for the temporary advancement of the bank's own money to
meet monthly spending commitments of a customer in their current account.
 Provide internet banking system to facilitate the customers to view and operate their
respective accounts through internet.
 Provide charge card advances of the bank's own money for customers wishing to settle
credit advances monthly.
 Provide a check guaranteed by the bank itself and prepaid by the customer, such as
a cashier's check or certified check.
 Notary service for financial and other documents
 Accepting the deposits from customer and provide the credit facilities to them.
 Sell investment products like mutual funds Etc.
The United States is the largest location for commercial banking services.

Investment banking services

 Capital markets services - underwriting debt and equity, assist company deals (advisory
services, underwriting, mergers and acquisitions and advisory fees), and restructure debt
into structured finance products.
 Brokerage services - facilitating the buying and selling of financial securities between a
buyer and a seller. Stock brokers generally require commissions or other charges for
brokerage services.
 Private banking - Private banks provide banking services exclusively to high-net-worth
individuals. Many financial services firms require a person or family to have a certain
minimum net worth to qualify for private banking service.[3] Private banks often provide
more personal services, such as wealth management and tax planning, than normal retail
banks.[4]
New York City and London are the largest centers of investment banking services. NYC
is dominated by U.S. domestic business, while in London international business and commerce
make up a significant portion of investment banking activity.[5]

Foreign exchange services

Foreign exchange services are provided by many banks and specialist foreign exchange brokers
around the world. Foreign exchange services include:

 Currency exchange - where clients can purchase and sell foreign currency banknotes.
 Wire transfer - where clients can send funds to international banks abroad.
 Remittance - where clients that are migrant workers send money back to their home
country.

Investment services
 Investment management - the term usually given to describe companies which
run collective investment funds. Also refers to services provided by others, generally
registered with the Securities and Exchange Commission as Registered Investment
Advisors. Investment banking financial services focus on creating capital through client
investments.
 Hedge fund management - Hedge funds often employ the services of "prime brokerage"
divisions at major investment banks to execute their trades.
 Custody services - the safe-keeping and processing of the world's securities trades and
servicing the associated portfolios. Assets under custody in the world are approximately
US$100 trillion.
New York City is the largest center of investment services, followed by London.
Insurance
 Insurance brokerage - Insurance brokers shop for insurance (generally corporate property
and casualty insurance) on behalf of customers. Recently a number of websites have been
created to give consumers basic price comparisons for services such as insurance, causing
controversy within the industry.[13]
 Insurance underwriting - Personal lines insurance underwriters actually underwrite
insurance for individuals, a service still offered primarily through agents, insurance brokers,
and stock brokers. Underwriters may also offer similar commercial lines of coverage for
businesses. Activities include insurance and annuities, life insurance, retirement
insurance, health insurance, and property insurance and casualty insurance.
 Finance & Insurance - a service still offered primarily at asset dealerships. The F&I
manager encompasses the financing and insuring of the asset which is sold by the dealer.
F&I is often called "the second gross" in dealerships who have adopted the model
 Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect them from
catastrophic losses.
The United States, followed by Japan and the United Kingdom are the largest insurance
markets in the world.

Other financial services

 Bank cards - include both credit cards and debit cards. According to the Nilson Report, JP
Morgan Chase is the largest issuer of bank cards.[15]
 Credit card machine services and networks - Companies which provide credit card
machine and payment networks call themselves "merchant card providers".
 Intermediation or advisory services - These services involve stockbrokers (private client
services). Stock brokers assist investors in buying or selling shares. Primarily internet-
based companies are often referred to as discount brokerages, although many now have
branch offices to assist clients. These brokerages primarily target individual investors. Full
service and private client firms primarily assist and execute trades for clients with large
amounts of capital to invest, such as large companies, wealthy individuals, and investment
management funds.
 Private equity - Private equity funds are typically closed-end funds, which usually take
controlling equity stakes in businesses that are either private, or taken private once
acquired. Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in
which they invest. The most successful private equity funds can generate returns
significantly higher than provided by the equity markets.
 Venture capital is a type of private equity capital typically provided by professional,
outside investors to new, high-growth-potential companies in the interest of taking the
company to an IPO or trade sale of the business.
 Angel investment - An angel investor or angel (known as a business angel or informal
investor in Europe), is an affluent individual who provides capital for a business start-up,
usually in exchange for convertible debt or ownership equity. A small but increasing
number of angel investors organize themselves into angel groups or angel networks to
share resources and pool their investment capital.
 Conglomerates - A financial services company, such as a universal bank, that is active in
more than one sector of the financial services market e.g. life insurance, general insurance,
health insurance, asset management, retail banking, wholesale banking, investment
banking, etc. A key rationale for the existence of such businesses is the existence of
diversification benefits that are present when different types of businesses are aggregated.
As a consequence, economic capital for a conglomerate is usually substantially less
than economic capital is for the sum of its parts.
 Financial market utilities - Organisations that are part of the infrastructure of financial
services, such as stock exchanges, clearing houses, derivative and
commodity exchanges and payment systems such as real-time gross settlement systems
or interbank networks.
 Debt resolution is a consumer service that assists individuals that have too much debt to
pay off as requested, but do not want to file bankruptcy and wish to pay off their debts
owed. This debt can be accrued in various ways including but not limited to personal loans,
credit cards or in some cases merchant accounts.

Financial exports
A financial export is a financial service provided by a domestic firm (regardless of
ownership) to a foreign firm or individual.
While financial services such as banking, insurance and investment management are
often seen as a domestic service, an increasing proportion of financial services are now being
handled abroad, in other financial centres, for a variety of reasons.
Some smaller financial centres, such as Bermuda, Luxembourg, and the Cayman Islands,
lack sufficient size for a domestic financial services sector and have developed a role providing
services to non-residents as offshore financial centres. The increasing competitiveness of
financial services has meant that some countries, such as Japan, which were once self-sufficient,
have increasingly imported financial services.
The leading financial exporter, in terms of exports less imports, is the United Kingdom,
which had $95 billion of financial exports in 2014. The UK's position is helped by both unique
institutions (such as Lloyd's of London for insurance, the Baltic Exchange for shipping etc.) and
an environment that attracts foreign firms; many international corporations have global or
regional headquarters in the London and are listed on the London Stock Exchange, and many
banks and other financial institutions operate there or in Edinburgh.
 Non-bank finance
Eight types of non-bank financial support

Although it is common for people in business to approach banks for finance, there
are other options available that may be a better fit for your business. Non-bank lenders may
have lower interest rates and charges, and be able to make loans over a longer period than a
bank. They can also be less restrictive about high loan to value and issues like poor credit
rating or experience of recent losses.
It is important you read all agreements carefully before you borrow from a non-bank
lender and find out if any assets will be required as security.

If you are interested in obtaining finance from a non-bank lender, consider

the following:
1. Commercial loan providers
Commercial loan providers - also known as non-banking financial
institutions - are organisations that provide financial services like loans and
credit facilities, but don't have a banker's licence. This means they cannot
take deposits from the public or offer normal banking facilities such as
overdrafts. However, they can have less restrictive lending criteria and may
be a useful and competitive source of funding.

Commercial loan providers include:

 Small Business Loan Fund provides unsecured loans to individuals, private companies and
social enterprises in the small, medium and micro enterprise size range.
 Growth Loan Fund provides unsecured loan finance to SMEs that can demonstrate strong
growth and export potential.
2. Social and community lending
You may be able to borrow money from a credit union which is likely to be
more affordable than a bank loan. There are also various lenders that offer
loans to disadvantaged groups, community businesses and social enterprises.
See social and community lenders.
3. Joint ventures and partnerships
One way to increase resources is to enter into a joint venture with another
business. This can offer many advantages - such as increased capacity, access
to new markets and the availability of greater technical expertise. See joint
ventures and business partnerships.
4. Factoring and invoice discounting
It may be possible for you to raise funds against unpaid invoices. Invoice
discounting, factoring or supplier finance can all be useful methods to
improve your business' cashflow. See factoring and invoice discounting.
5. Equity finance
You could sell shares in your business if you want to raise long-term finance.
This would mean you won't have to repay the debt or pay interest, but it will
 involve partly giving some ownership of your business and its future profits.
There are various sources of equity finance, including venture capital, the
stock market and business angles. See equity finance.
6. Crowd funding
Crowd funding is where a number of people each invest, lend or contribute
small amounts of money to your business or idea. If you seek funds this way,
you would typically set up a profile of your project on your website then use
social media and various networks of business, family and friends to raise the
money. See crowd funding.
7. Family and friends
Family and friends can offer credit on a flexible, long-term and low-cost(or
free) basis. You should make sure that the terms of any loan are clearly
understood by both parties. See financing from friends and family.
8. Government financial support
If your small business is struggling to access bank finance, there is
a government scheme in which the biggest banks will pass on details of any
businesses they have rejected to three alternative finance providers.
These are:
 Funding Xchange
 Business Finance Compared
 Funding Options

If your business is new or expanding, you could be eligible for business development grants
or other government support schemes. See grants and government support.

Lease
is a contract outlining the terms under which one party agrees to rent
property owned by another party.
It guarantees the lessee, also known as the tenant, use of an asset and
guarantees the lessor, the property owner or landlord, regular payments from
the lessee for a specified number of months or years.
Both the lessee and the lessor face consequences if they fail to uphold the
terms of the contract.

BREAKING DOWN Lease

Leases are the legal and binding contracts that set forth the terms of rental
agreements in real estate. If a person wishes to rent an apartment or other
residential property, for example, the lease prepared by the landlord describes the
monthly rent amount, when it is due each month, what happens if the lessee fails
to pay his rent, how much of a security deposit is required, the duration of the
lease, whether the lessee is allowed to keep pets on the premises, how many
occupants can live in the unit and any other essential information.
The landlord requires the tenant to sign the lease, thereby agreeing to its
terms before occupying the property. Leases for commercial properties, on the
other hand, are usually negotiated in accordance with the specific lessee and
typically run from one to 10 years, with larger tenants often having longer, and
more complex, lease agreements.
Breaking a Lease

Consequences for breaking leases range from mild to damaging, depending

on the circumstances under which they are broken. A tenant who breaks a lease
without prior negotiation with the landlord faces a civil lawsuit, a derogatory
mark on his credit report or both.
As a result of breaking a lease, a tenant may also encounter problems
renting a new residence, as well as other issues associated with having negative
entries on a credit report.
Tenants who need to break their leases often must negotiate with their
landlords or seek legal counsel.
In some cases, finding a new tenant for the property or forfeiting the
security deposit inspires landlords to allow tenants to break their leases with no
further consequences.
Some leases have "early termination" clauses that allow tenants to terminate
the contracts under a specific set of conditions or when their landlords do not
fulfill their contractual obligations.
For example, a tenant may be able to terminate a lease if the landlord does not
make timely repairs to the property.
Commercial Real Estate Leases
 Tenants who lease commercial properties sign various types of leases
structured to put more responsibility on the tenant and provide greater up-front
profit for the landlord.
For example, some commercial leases require the tenant to pay rent plus
the landlord's operational costs, while others require tenants to pay rent plus
property taxes and insurance.
The four common types of commercial real estate leases include:
single-net leases, in which the tenant is responsible for paying property taxes;
double-net leases, which make a tenant responsible for property taxes and
insurance; triple-net leases, where tenants must pay property taxes, insurance and
maintenance; and gross leases, in which the tenant pays rent while the landlord is
responsible for other costs.

Hire Purchase Agreement / Contract

Hire purchase agreement or contract is an agreement of purchase where
the goods or assets are let out on hire by the seller/finance company (creditor) to
the user of goods/ assets i.e. hire purchase customer (Hirer). The hirer pays
installments at regular intervals in the form of consideration and gets the
ownership of the asset after paying the last installment.
Hire purchase is a contract between two parties where a purchaser agrees
to pay for goods in parts. The hire purchase agreement was first initiated in the
United Kingdom for situations where the buyer could not afford to pay the
required price for an item as a lump sum but could afford to pay at regular
intervals small amounts.
The seller asks for a sum equal to the original price of the asset plus
interest to be paid in equal installments. If the buyer defaults in paying the
installments, the seller may repossess the goods.
CONTENTS OF HIRE PURCHASE AGREEMENT
1. The date on which the agreement is to be made.
2. The details of the seller/ finance company (of one part):
 Name
 Address
 Type of Business
  Type of organization like proprietorship/partnership firm/ Company etc.
3. The details of the purchaser/ hirer (of the other part).
4. The date on which the asset is let out on hire and the period up to which it is let out.
5. The name, type, model no. and make of the asset to be let out.
6. Details of installation expenses and the person who is going to bear it.
7. The cash price of the asset.
8. The hire purchase price i.e. (total of all installments + any deposit + any fees)
9. The payment details:
Amount of installment
 Time of payment i.e. first day / last day / any date of the month.
 Nature of interval i.e. monthly, quarterly etc.
 Mode of payment i.e. cash/ cheque.
10. The authority of inspection of the asset by the owner or a person assigned by him.
11. Details of the rights of the hirer, in case he wants to terminate the agreement.
12. Consequences when the hirer defaults in paying the installment amount or breaches any point in
the contract i.e. the owner has the rights to re-take possession of the assets on these grounds.
13. A statement that the owner at his will can grant relaxation of any sort.

The agreement shall be signed by the two parties indulged in the presence of two
witnesses.
 Hire Purchase Agreement
POINTS TO BE NOTED WHILE PREPARING THE HIRE PURCHASE
AGREEMENT

1. One should pay extra care while selecting the asset. He should
enquire whether the asset he has asked for is not already owned by
anyone else. It may so happen that the person might not actually
own it and therefore does not have the right to sell it off.

2. Secondly, keep a check on the cumulative installment amount to

make sure it is not unreasonably more than the value of the asset.
3. The hirer should also possess the copy of hire purchase agreement.

This mode is generally used for cars and high-value electrical goods where
the buyers are not able to pay for the goods directly.
After all, hire purchase agreement is also an agreement like any other
agreement. There is no fixed rule like 2+2=4. Any agreement cannot be said as
the good or bad. The agreement can be changed as per the convenience with the
consent of both the parties i.e. hirer and the HP company.
The hirer should make sure that the agreement mentions the hire charges
and other terms of payment and their consequences in the manner he understands
and interprets and the terms are favorable as far as possible and agreeable.
Similarly, the hire purchase company should look for its interest in the
agreement. In the end, the agreement should have clarity of terms mutually
agreeable to each party.
In-House Financing
In-house financing is a type of seller financing in which a firm extends customers a loan,
allowing them to purchase its goods or services. In-house financing eliminates the firm's
reliance on the financial sector for providing the customer with funds to complete a transaction.

BREAKING DOWN In-House Financing

In-house financing is provided by many retailers helping to facilitate the purchasing

process for customers. Retailers must have an established lending business within their firm or
partner with a single third-party credit provider to service credit for their customers.

The automobile sales industry is a prominent user of in-house financing since its
business relies on buyers taking auto loans to close the purchase of a vehicle. Offering a car
buyer in-house financing helps a firm to complete more deals by accepting more customers.
Automobile dealers also have the benefit of setting their own standards for underwriting which
can sometimes encompass a greater number of borrowers by potentially allowing for lower
credit score acceptance. In many cases, these lending platforms will accept borrowers that
banks or other financial intermediaries might turn down for a loan. Other industries offering
in-house financing may also include equipment manufacturers, appliance stores or e-commerce
retail stores.

Point-of-Sale Financing

With the emergence of new financial technology companies and systems in the credit
market, many borrowers now have greater in-house financing options through faster and more
convenient point-of-sale credit platforms that are backed by the selling company. Point-of-sale
credit technology can be built around a company’s in-house credit department or generally
facilitated when a company partners with a single credit provider to service their customer’s
lending needs.

Point-of-sale financing simplifies the lending process for customer’s by allowing them
to apply for credit at the point in which they are ready to buy. Point-of-sale financing makes
credit convenient for customer’s since they can receive a credit decision from the retailer in
minutes. Point-of-sale financing is also conveniently integrated into the sales process
technology for retailers making the deal easier to close.

Ford Credit

Ford Credit is one of the most well-known in-house auto financing groups.

In January 2017, Ford Credit partnered with AutoFi to make car buying and financing
even easier through technology that allows the buyer to shop online for their car and auto loan.
With this new point-of-sale platform, Ford customers can shop online through Ford dealer
websites, buy and finance their car. This type of customer experience allows car buyers to
spend less time at the dealership while also offering a faster sales process for Ford.
 Capital Market
Chapter 2
Money Market Management

Cash Management

It is very important to ensure that sufficient cash is available to meet obligations and
that idle cash is appropriately invested. One function of the company “treasurer” is to examine
the cash flows of the business, and pinpoint anticipated periods of excess or deficit cash flows. A
detailed cash budget is often maintained and updated on a regular basis. The cash budget is a
major component of a cash planning system and represents the overall plan that depicts cash
inflows and outflows for a stated period of time. A future chapter provides an in-depth look at
cash budgeting.

Although cash shortages may seem to be a sign of weakness or mismanagement, this is not
always the case. Successful companies may need cash for new business locations, added
inventory levels, growing receivables, and so forth. Careful cash planning must occur to sustain
growth.

Strategies to Enhance Cash Flows

As a business looks to improve cash management or add to the available cash supply, a number
of options are available. Some of these solutions are “external” and some are “internal” in
nature.

External solutions include:

Issuing additional shares of stock — This solution allows a company to obtain cash without
a fixed obligation to repay. Unfortunately, the existing shareholders do incur a detriment,
because the added share count dilutes the ownership proportions. In essence, existing
shareholders are selling off part of the business.

Borrowing additional funds — This solution brings no shareholder dilution, but borrowed
funds must be repaid along with interest. Thus, the business cost and risk is increased. Many
companies will pay a fee to establish a standing line of credit that enables them to borrow as
needed.

Internal solutions include:

Accelerate cash collections — If customers pay more quickly, a significant source of
cash is found. Simple tools include electronic payment, credit cards, and cash discounts for
prompt payment.
 Postponement of cash outflows — Companies may delay payment as long as possible.
Paying via check sent through the mail allows use of the “float” to preserve cash on hand.
However, one needs to know that it is illegal to issue a check when there are insufficient funds
in the bank to cover that item.

Cash control — Internal control for cash is based on the same general control features
introduced in the previous chapter; access to cash should be limited to a few authorized
personnel, incompatible duties should be separated, and accountability features (like
prenumbered checks, etc.) should be developed.

Control of receipts from cash sales should begin at the point of sale and continue
through to deposit at the bank. Specifically, point-of-sale terminals should be used, actual cash
on hand at the end of the day should be compared to register reports, and daily bank deposits
should be made.

Control of receipts by mail begins with the person opening the mail. They should
prepare a listing of checks received and forward the list to the accounting department. The
checks are forwarded to a cashier who prepares a daily bank deposit. The accounting
department enters the information from the listing of checks into the accounting records and
compares the listing to a copy of the deposit slip prepared by the cashier.

Controls over cash disbursements include procedures that allow only authorized
payments and maintenance of proper separation of duties. Control features include making
disbursements by check, performance of periodic bank reconciliations, proper utilization of
petty cash systems, and verification of supporting documentation before disbursing funds.

. Credit Management policy

This is an operational document defining a number of operating rules for the sales process that
must be followed by the entire company including of course the credit team.

It defines the standard conditions of sale (standard payment terms, early payment discount
rate... etc.) and the processes to apply the rules (how to open an account, how to set a credit
limit, how to recover the bills ...etc.). Credit management policy

These rules are intended to do "good" sales and to converge business strategy, commercial
stakes and financial issues (credit risk, cash, profitability, working capital improvement).

Why implement a credit management policy?

The establishment of a procedure for credit management is necessary and critical

in business since the number of employees exceeds ten and unwritten rules that are no
 longer appropriate. It defines the rules of operation at each stage of the sales process
and clarifies the responsibilities in line with the business strategy.

Credit management strategy

Key factor of success, it must be shared between vendors, business management and
finance department. It is a document which specifies operating "standard" modes for all
stakeholders while providing rules for exceptions.

Indeed, the principle of the trade is to be specific to a business relationship to another,

from an economic context to another. Each company must be able to adapt its offer to it and
sometimes depart from the rules of running operations it has set itself.

The credit policy does not include irremovable rules. It is not a static document for
financial controller which gathering dust in a corner office. This is an operational document
which sets operating modes in accordance with the interests of the company whose ultimate
goal is to be paid by its customers.

The division of tasks between employees can generate antagonists interests, as may be
the case between finance and sales department. But the supreme interest of the company must
prevail. This is the role of the procedure for credit management. It reconciles interests by
setting limits to each of them and providing for arbitration in specific cases.

Operating rules established by the procedure may in some cases be overridden but
within a framework defined in advance. Thus, it includes a chart of authority which determines
for each decision committing an additional risk to the company the power of validation of each
actor. For example, sending a new order for a customer who is in default of payment for more
than 30 days may be subject to the validation of the CFO.

In addition to clarifying responsibilities, adherence to such a procedure is used to circulate

information in the vertically (hierarchically subordinate) and horizontally (across multiple
services).

It promotes communication and mutual understanding of the different stakeholders. It

therefore avoids the "silos" generated by the withdrawal of each service who does not
understand the attitude of other services.

Finance and commerce are not intended to quarrel but to understand each other because
everyone has a share of the primary interest of the company.

Of course a company must sell and develop its sales, obviously it must ensure its sustainability
by avoiding overdue and bad debts. These issues are not exclusive, quite the contrary. This is
what helps the establishment of a procedure of credit.

Which the rules for which processes?

The purpose of the credit management policy is to define rules on all steps that are likely to
generate business risk by committing financial resources. This is done in order to manage this
risk and to minimize them.

Well managed, a risk can become an opportunity. For example, if you have evaluated a
customer as insolvent, you can request a payment in advance against an interesting discount.
This helps to improve cash flow of the business while avoiding any credit risk.

Main stages of the sales process

Timing diagram of the sales process:

Sales process

1) commercial prospection

Business development incurs costs and should be well oriented to be effective. It is for example
against-productive to spend time and money to win an order with an insolvent potential client:

The financial position of the buyer intends more to regression or disappearance through a
bankruptcy rather than becoming a key player in the market,

Win a business with this company will result in payment delays or even unpaid invoices and
losses,

It is therefore essential to take into account the financial situation of companies before
prospecting them. Better canvass companies in good financial health and with good potential.

2) Quotations

These deals can be engaging for the seller, it is necessary to include commercial conditions
(conditions and mean of payment, guarantees... etc) coherent with the context and the
creditworthiness of the buyer. Credit risk starts at this stage. It is therefore necessary to define
how it is assessed (financial analysis, credit rating etc ...) and how it is managed.

3) Customer account opening

The customer opening account must follow certain basic rules to obtain necessary information
in order the administrative flows are fluid and do not disrupt the business relationship. Defined
rules specify what documents / information to be obtained prior to account opening and who
must obtain them.

4) Payment terms and credit limit set up

This stage occurs during the trade negotiations and may be before or after the opening of
account. It is here that are approved payment terms (payments, deferred payment, method of
payment, invoicing schedule ... etc), and any guarantees (bank guarantees, parent company
guarantees, delegation of payment, documentary credit ... etc.. ).

This is the heart of the prevention of outstanding risk. These conditions should be an integral
part of commercial negotiations and result from risk analysis that was done previously. The
credit management process defines the standard conditions, checks if it is possible to grant
them to the client and manage any deviations from this rules.

5) Delivery and invoicing

This step should not be overlooked as it is often a source of disputes that generate late payment
and have negative impacts on the business relationship. The credit management process
specifies the prerequisites for billing in a timely manner and the key steps to check to do a good
billing and not make errors (price, date of invoice, customer name, etc ...).

6) Friendly collection

Essential phase not to suffer late payments, the cash collection should be structured and
professionalized to be effective. Well done, debt collection lends credibility to the seller,
significantly improves cash flow and contributes positively to build a commercial relationship.

The recovery process must be defined in a combined result of recovery actions (phone calls,
email, mail return receipt, intervention of the sales representative ... etc) and agreed between
the recovery service or accounting and sales managers.

It also specifies how are used late payment penalties to get customers to pay in a timely
manner.

7) Litigation

In case of failure of amicable collection that ended with sending a letter of formal notice,
collection action continues but with other means. These are numerous and depend on the
organization of each company and its customer types:

Lawsuits handled by the seller with the contribution of a lawyer (referred provision,
payment order or assignment payment),

a. Collection agencies,
b. Bailiffs,
c. Credit insurers.
 Conclusion

The credit management policy includes all the steps above, describes how they are
implemented and by whom. It must be operational and concrete and therefore be adapted to
each company. There should not be two identical procedures as each business is unique and has
its own strategy.

It represents the application in practice of a business strategy and management of

customer credit defined by the direction of the company. It allows to structure the business,
improve performance and relationships between the different services that compose it.

In a complex and difficult economic context, the implementation of such rules gives a
direction to the company and its employees and helps protect as much as possible his company
from overdue and losses, responsible of a business failure on 4 and many broken dreams of
entrepreneurs.

Well established and applied it will help to improve cash flow and working capital needs
of the company and to preserve its future and fostering its development.