FIN320 - 9

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  1. Adverse Selection
    An incentive for better quality customers to leave in search of lower borrowing costs while the poorer quality customers remain.
  2. Asymmetric Information
    Reference to the distribution of information between borrower and lender being unfavourable to the borrower.
  3. Credit Rationing
    Can occur in loan markets where the point of market equilibrium involves demand being greater than supply and credit having to be rationed.

    Consequences of information asymmetries between borrowers and lenders.
  4. First Way Out
    (Normally) the cashflow from the borrower's operations.
  5. Hard Information
    Easy to quantify and communicate.
  6. Indicator (Prime) Lending Rate
    Rate used to quantify the cost of funds to the lending institution.

    Lending to any small business borrower is usually done at a margin over the indicator rate.

    The margin reflects credit risks involved.
  7. Security
    Collateral for a loan

    Small business lenders favour residential securities.
  8. Short-term Liquidity
    Measure of the ability of a business to manage its liquidity via movements in current assets and current liabilities.
  9. Small Business
    Australian Bureau of Statistics - Fewer than 20 employees

    RBA - Has loans of less than $500,000
  10. Small Proprietary Company
    Not required to provide detailed financial statements (most small businesses)
  11. Soft Information
    Difficult to quantify, substantiate and communicate.

    (Information about the borrower's character)
  12. Soft Spots
    A reference to debtors, creditors and stock in the balance sheet as they are relatively easy to manipulate.
  13. Specialised Risks with Lending to Small Business (!!!)
    Key person risk

    Lack of capital

    Lack of a track record

    Poor quality of accounting information

    Risks and small business failure
  14. Poor Quality of Accounting Information (!!!)
    Delays in the preparation of financial advice

    Emphasis on taxation

    Reporting freedoms for a small proprietary company

Card Set:
FIN320 - 9
2017-10-23 22:46:44

FIN320 - Small Business Lending
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