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Business case truck financing

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Business Case - Truck Financing

Business Case - Truck Financing

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  • 1. Business Case – Truck Financing BUSINESS CASE Truck FinancingPlayersTruck Manufacturer (TM)Buyers of TrucksDealersTruck Financer (TF)Commodity: TrucksRoleTM: They are the truck manufacturerBuyer: They are the buyers and end-users of the trucks. They can be located in anypart of IndiaDealer: They are the authorized dealers of trucks and presently located in somemajor cities and in future can be located in any part of India. They are the go-between TM and the buyerFinancer: They would finance the truck to the buyer. They would assess the buyer’scapability and accordingly arrange the finance through Factoring or Bill Discounting.Maximum Percentage of Financed Amount: 90%Author: Partho H. Chakraborty 1
  • 2. Business Case – Truck FinancingMinimum Amount Buyer Pays: 10%Tenor: 1. The minimum tenor of loan is for 6 months. 2. The maximum tenor of loan is for 60 months.Note: Exceptions can be for 84 monthsTime Frame 1. Maximum 28 Days to process the papers and handing over the Delivery Order (DO) to the Dealer by TFSecurity: 1. Promoter’s Personal Guarantee 2. Truck hypothecated to TF 3. Post Dated ChequesRequirement:TM needs a solution which will map the process flow from the moment the customerapproaches the dealer for a truck to the financing of it. It continues from there tocollections each month and also extends to recoveries in case of defaults.Author: Partho H. Chakraborty 2
  • 3. Business Case – Truck FinancingIt should calculate the IRR and map the risk of defaults. It should also profile thecustomer showing the behavioral analysis. In case of default, it should map therecovery process till payments are completed or the asset is possessed.The solution should calculate taxes and commissions and must also calculate thedepreciated value of the asset year after year till the payments are completed andthe assets are written off the books.Transaction: 1. Buyer approaches dealer and makes an enquiry regarding purchase of trucks. 2. Dealer informs the customer the basic requirements and passes on information regarding the enquiry to TF and TM. 3. The customer gives the TF all the documents 4. TF whets the documents and decides to finance the truck or not. If ‘yes’ then the tenor and amount of loan is mentioned and if ‘no’ a polite rejection letter is sent 5. The customer must give his acceptance or his rejection on the offer 6. If he accepts the offer then the customer gives TF and post dated cheques. 7. TF then sends DO to the Dealer. 8. The dealer gives the DO to TM and TM gives the truck to dealer. 9. The dealer gives the delivery of truck to the buyer. 10. The customer pays TF Equated Monthly Installment (EMI) every month till all the payments are made. 11. Transaction EndsAuthor: Partho H. Chakraborty 3
  • 4. Business Case – Truck FinancingNote: 1. In case of defaults TF will follow up for payments till the EMI’s are completed or the asset is possessed. If need be it could restructured. 2. The customer also needs to renew insurance every year. 3. In case of pre-payment of the loan, the system will calculate the pre-payment penalty charges and foreclose the loan.Indicative Cost:Payments: TFS.No. Particulars Amount (`)1. Cost of Truck 2,500,000=002. Taxes (@12.5%) 312,500=003. Commission to Dealer (@2%) 50,000=00 TOTAL 2,862,500=00Receipts: TFS.No. Particulars Amount (`)1. Down Payment (@ 10% of Total Cost) 250,000=002. Taxes (@12.5%) 312,500=003. First EMI 53,527=34 TOTAL 616,027=34Note: 1. EMI is calculated @ 15% for ` 2,250,000 for 60 Months 2. 59 Cheques for ` 53,527=34 is taken from the customer, if the customer does not opt for ECS, SI, etc. 3. This is an indicative example not the actual working and the Cost of Truck is just indicativeAuthor: Partho H. Chakraborty 4
  • 5. Business Case – Truck FinancingFlowchart: - THE FIRST PARTThe Process Flow to acquire a Truck 18 15 Customer 2 Dealer 1 14 3 16 17 5 7 4 TF 10 9 6 TF 11 Rejects Offer 8 Customer 12 Transaction Ends 13Author: Partho H. Chakraborty 5
  • 6. Business Case – Truck FinancingTable.STEP DAY EVENTNO. NO. 1. 1 Customer approaches Dealer with enquiry 2. 1 Dealer entertains the customer, gets preliminary details 3. 1 Dealer passes the enquiry to TF 4. 3 TF contacts the customer and gives him the list of the documents 5. 8 Customer gives TF the documents required 6. 15 TF whets the documents and carries out a Risk Assessment of the customer’s probability to default 7. 16 If TF does not find the customer credit-worthy it informs the customer and sends it a polite rejection letter 8. 16 TRANSACTION ENDS 9. 16 If TF finds the customer credit-worthy it informs the customer and sends it a letter for the same10. 18 Customer gets an acceptance letter and considers it’s terms and conditions11. 20 If customer rejects the offer he communicates the same to TF12. 20 TRANSACTION ENDS13. 20 If customer accepts the offer he signs his acceptance and gives it to TF14. 21 Customer signs a contract with TF15. 25 Customer makes the down payment to the dealer and gives the dealer the acceptance letter from TF16. 25 Dealer sends TF intimation regarding receipt of down payment17. 26 TF gives dealer D/O18. 27 Dealer releases the truck to the customer 75/145 TRANSACTION ENDSNote: The days are taken on an approximate basis and is an indicator to the timetaken for the processAuthor: Partho H. Chakraborty 6
  • 7. Business Case – Truck FinancingFlowchart: - THE SECOND PARTThe Process Flow to service the loan after it is disbursed 6 Payments CUSTOMER A 5 7 8 Investigations 1 9 TF BANK Restructure 2 10 New Payment Terms 12 3 Status Can he pay 13 4 11 A 14 Steps Taken Why not Possessed 17 Asset 21 Repossessed 18 25 A Asset Cost Recovered 15 Asset Does Not Exist Asset Repossessed 20 19 16 Transaction Ends 23 Is it Asset in Litigation? 24 Steps Taken to 25 Repossess the Asset A 22Author: Partho H. Chakraborty 7
  • 8. Business Case – Truck FinancingSTEP EVENTNO. 1. TF sends cheques to the bank for payment 2. Bank sends cheques for clearing 3. IF cheques are cleared TF gets the credit 4. If the cheques are not cleared then bank returns cheques to TF 5. TF informs customer of returned cheques 6. Customer re-initiates the process for payments 7. The customer can give a new cheque or can ask TF to represent the bounced cheque 8. The customer may not be able to make any payment and TF would investigate the matter 9. The customer is given a restructuring of his payments10. Customer accepts restructuring offer with new payment terms11. Fresh cheques are issued to TF12. Customer does not accept restructuring offer with new payment terms. So can he pay?13. If customer can pay then customer re-initiates the process for payments14. Customer cannot pay as he is bankrupt so is the asset repossessed15. Asset is repossessed16. Transaction Ends17. Asset not repossessed, so why was it not repossessed18. Does the asset exist19. Is the asset in litigation or is it a write-off or in a very poor condition20. If asset does not exist then what steps are being taken such as Insurance recover the cost21. Asset Cost Recovered22. Transaction Ends23. If under litigation or write-off then what steps are being taken such as Insurance recover the cost24. It the asset is not under litigation or write-off then what steps are being taken to repossess it25. Is the asset repossessed and the process follows logically TRANSACTION ENDSAuthor: Partho H. Chakraborty 8
  • 9. Business Case – Truck FinancingSub Procesess 1. Risk: When TF would whet the customers it would profile them for probability of default. This should also preferably cover the customer behavioral pattern especially in a default situation. 2. Defaults: The Collection Process must come in picture with reminders, follow- ups including restructure of loans to repossession of assets. 3. Insurance: The CRM must call up the customer a week prior to the expiry of insurance and remind the customer that their insurance is pending for renewal. It must follow-up till the insurance is renewed and the policy details are entered in the system. 4. Contracts: The contract can be one simple contract such as: 1 Contract 1 Truck or 1 Contract Multiple Trucks 5. Payments: The payments must configure the following – a. Post Dated Cheques Processing b. 1 Cheque 1 Truck c. 1 Cheque Many TruckAuthor: Partho H. Chakraborty 9
  • 10. Business Case – Truck FinancingNote: Names if any are Suggestive only and without any relation to any real entity whatsoever. It is only to give a feel and touch of how transactions can be structured and names are indicative This article is meant for education purposes only and it is not be reproduced for any commercial purpose by print or electronic medium whatsoeverThis case study is written by:Partho H. ChakrabortyA - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore -560 037, IndiaTel: +91 80 420 50293, Cell: +91 99863 22504email: parthohc@airtelmail.in; parthohc@rediffmail.comSkype: parthohc01Author: Partho H. Chakraborty 10