Reason of revolving Line Of Credit

There are numerous reasons the business may want to consider opening a revolving line of
credit.
 Access to a flexible source of funding.
 Working capital on a periodic or seasonal basis.
 A non-specific amount of funding for an upcoming project or investment.
 The ability to borrow money quickly in an emergency.
 A way to build better business credit history and credit scores for the future
Revolving Line of Credit Interest Formula
(Principal Balance X Interest Rate X Days in Month) / 365
Installment debt

 Installment debt, or term debt, is a loan people take out and pay back using a payment
schedule.
 With each payment people make, the balance decreases.
 After using the loan amount, people cannot continue to borrow more money, which is
different from revolving debt.
 Installment debt is predictable because the month-to-month payment liability typically
does not change.
 Example ABC trading plc. Is a business enterprise engaged on rental of construction
machineries The Company import different kinds of construction machineries in order to
rent thorough a bay bank. In the year 2013 muffin engineering plc. Imported roller
machine at a cost of 5,000,000 birr, 60% of the cost of machine is covered by credit
facility from Abay bank. The loan will be repaid within five years at equal installment
quarterly at a cost of 12% interest rate, the total service charge and the cost related with
credit facility is 2000 for the first year of the loan period and 2500 the second year of the
loan period. Assume that the bank interest policy is simple interest rate on outstanding
loan and advances.
A. calculate principal repayment and cost of loan related with first year loan period
B. what is the outstanding balance of loan at the end of three year loan periods
Given
Borrowed = 5,000,000 x60% = 3,000,000
 Time = 5 x 4 =20
Interest rate = 12%
Service charge
1st year =2000
2nd year =2500
Solution A.

Installment paid amount =5,000,000/20 =150,000

First year principal repayment =150,000 x4 =600,000

B. Outstanding balance =150,000 x8 =1,200,000
Difference between installment debt and revolving debt
Types of Credit Facilities
A. Short term credit facilities: Cash credit and overdraft, Trade finance

B. Long term fixed credit facilities:

Bank loans This is a very common long term credit facility that comes with a definite tenor and
repayment schedule.

Notes: This is an unsecured credit facility that is mostly raised from private or capital market.
Therefore, it is usually only considered when banks are not willing or have reached their lending
limit.

Mezzanine debt: This credit facility is only provided by private equity

Credit Facility Work

Credit facilities can operate as a revolving line of credit—the business that gets the line of credit
withdraws up to a certain limit when the situation demands it—but this is not always the case.

2.2 Discussing the differences between unsecured and secured loans

2.2.1 Secured loans
A secured loan, you need collateral. Just as a house is held as collateral in the case of a mortgage
loan and auto for an auto loan, you need some type of collateral for a secured personal loan.
Your collateral might be money in a traditional savings or credit union share account, share
certificate or CD.

Secured personal loans typically have lower interest rates than unsecured loans.

2.2.2 Unsecured loans

Unsecured loans attract higher interest rates due to increased risk to the lending institution

With unsecured loans, lenders don't have rights to any collateral for the loan.

Unsecured loans attract higher interest rates due to increased risk to the lending institution

2.3 Implications of default on secured loans

 A. Low credit scores can impact several areas of your life. You might have a harder time
renting, finding a job, signing up for utilities and mobile phone service, and buying
insurance.
B. Increased Costs
Defaulting can also increase your debt. Late payment fees, penalties, and legal costs might.

In fact, considering the effects of compound interest, outstanding debt grows quickly

Certain events, conditions, or circumstances may be considered a breach of contract and,

therefore, an event of debt default. Events of default include, but are not limited to:

 Non-payment or late payment of interest and/or principal

 Covenant breaches
 Changes in ownership or control

3.1 Comparing Fees, costs and profit

3.1.1 Definition of Fee, Cost and Profit
Fee: charge or payment for professional services a sum paid or charged for a privilege:

An admission fee, charge allowed by law for the service of a public officer.

Fees and costs associated with different credit options may include:
 Account servicing fees: the receipt of company due to render of service by business or
individual.
For example: individual is deposit of money in bank
 Credit purchase fees; is the amount fee that receive by individual for purchase when
early payment in of product.
Purchase Discounts
 The arrangements agreed up on by the buyer and the seller as to when payments for
merchandise are to be made is called credit terms. If payment is required immediately
upon delivery, the terms are said to be “cash” or “net cash”. Otherwise, the buyer is
allowed a certain amount of time known as the credit period, in which to pay.
  Late payment fees: is the type of receive fee that receive by individual due to penalize of
payment.
 Loan establishment fees: - Also called 'application', 'up-front', 'start-up' or 'set-up' fees.
An establishment fee is a one-off payment when you start your loan. If you are not
charged an establishment fee, you may pay higher on going fees.
 Withdrawing from a foreign Automatic Teller Machine (i.e. the ATM of a lending
institution other than your owns. These types of payment that receive by company due to
receive of service charge of the bank.
 Cost: A cost is an expenditure required to produce or sell a product or get an asset ready
for normal use. In other words, it’s the amount paid to manufacture a product, purchase
Inventory, sell merchandise, or get equipment ready to use in a business process.
 Profit is defined as the amount gained by selling a product, which should be more than
the cost price of the product.

 Profit or Gain = Selling Price – Cost Price

 But, when the product is sold at selling price lesser than the cost price, it is termed as loss
business activities.
Interest=Face Amount (or Principal) x Rate x Time

3.2 Analyzing non-interest bearing loan

According to Accounting Tools, a non-interest-bearing loan is a loan or debt on which the borrower is
not required to pay interest.

3.3 Features and Associated Risks of Fixed Versus Variable Interest Rates
3.3.1 Definition of Fixed and Variable interest rate
Variable interest Rate

A variable interest rate means that the interest you are charged changes as whatever index your
loan is based on changes. Loans can be based on the rate of the one-year T-bill or the prime
lending rate among other factors.

Fixed interest Rate

A fixed interest rate means that the interest rate that you will be charged over the term of your
loan will not change, no matter how high or how low the market may drive interest rates.

N.B In general, variable rate loans tend to have lower interest rates than fixed versions, in part
because they are a riskier choice for consumers.

3.4 Ways to Compare Advertised Interest Rates and the Effects of Fees
3.4.1 Ways to compare advertised interest

A comparison rate is a tool to help consumers identify the true cost of a loan. It is a rate which
includes both the interest rate and fees and charges relating to a loan, reduced to a single
percentage figure. For example, a bank’s advertised interest rate may be 5.49% and its
comparison rate 6.75%.

3.4.2 Reason of advertised interest rates

1. Credit score is less than excellent

2. Shopping for a vacation home

3. Lender doesn’t want to get competitive

UNIT FOUR: DISCUSSING THE EFFECTIVE USE OF CONSUMER CREDIT

4.1. Discussing Ways of avoid Excessive or Unmanageable Debt

4.1.1 Definition Unmanageable Debt
Unmanageable debt generally means having more debt payments than we can keep up with and
a monthly basis. More specifically, it means the total of our monthly expenses and debt
payments exceeds our monthly net income.

4.1.2 Ways of avoid unmanageable debt

There are five steps to avoid unmanageable debt
Step 1: Evaluate the Debts
Step 2: Look at the Budget
Step 3: Make a Plan

Step 4: Start Negotiations

Step 5: Follow-Through the Debt Reduction Plan

4.2 Strategies to Minimize Fees on Credit

Basically, there are seven Strategies to Minimize Fees on Credit

1. Your accounts stay out of collections.

2. Enjoy a lower interest rate.

3. Avoid late fees.

4. Improve your credit score.

5. Get lower insurance rates.

6. Keep your monthly payments low.

7. Keep your credit card in good standing.

4.3Importance of Meeting Minimum Payments on Credit Cards

The important of minimum payment credit card is:

1) Save money

2) Get to debt-free faster

3) Raise the credit score

4.4. Ways to Avoid Credit Card Fraud

Ways to avoid credit card fraud include:

 not disclosing Personal Identification Number (PIN) to anyone

 selecting a PIN only the card holder would know
 Signing the back of the credit card.