Parri passu
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Parri passu Document Transcript

  • 1. If a lender A has a first Charge on Property XYZ and Lender B has a Second charge on the sameproperty , and the Company creates a subservient charge in respect of the same property then in case ofnonpayment of the Loan the subservient holder will get which is left after paying First to A and then to B,in that case subservient holder may or may not get his amount.First charge over the property means the lender gets first right to appropriate his dues on disposal ofthe property and hence any subsequent mortgagee only get the surplus if any after sale of property.Whereas in the case of pari pasu charge (no first pari passu in such case, all the participating lendersget share of the sale of the property, proportionate to their quantum of release of loan, in aconsortium or multiple lending.What is the meaning of pari passu charge?Pari Passu is a term used in banking transactions which means that the charge to be created is incontinuation of an earlier charge which might be held by the same institution or by an otherinstitution.What is meant by Parri Passu Charge?Parri Passu is derived from Latin for with equal progress. The phrase is used to indicatesimultaneous and equal change or to describe similar ranking of securities or lenders; forexample, when a new issue of shares is made, they could be said to rank pari passu, ie, equallywith existing shares for the purposes of dividend payments. A common agreement between jointlenders is a pari passu clause under which, in the event of a shortfall, they agree to share equallywhatever is available.The use of "Pari Passu" when creating a charge means that when company Y goes intodissolution, the assets over which the charge has been created will be distributed in proportion tothe creditors respective holdings. Therefore, if the Bank X has tendered a loan facility of 60million PKR while another creditor, say Z, has tendered 40 million PKR, the recovery afterselling assets of Company Y to which joint pari passu charge attached, shall be distributed in theratio of 6:4 amongst X and Z. Where preferential rights attach to assets of the company, thepreferential creditors rank higher in the distribution stakes i.e. they are paid in priority to othercreditors of the company
  • 2. Types of Business LoansAfter a small business owner has taken all the necessary steps to begin to establish a positivecredit history through vendor lines of credit and small credit cards, applying for other types ofbusiness loans becomes a more realistic option. At this point, understanding the different featuresthat can be included in a business loan is very helpful when trying to determine which businessloan is the right one for you.Agreements: Often, the business owner must agree to maintain accurate financial statements andbusiness records, to perform at certain standards based on financial ratios, and keep their tax andinsurance payments current.Collateral: In a business loan, collateral is a security or guarantee (usually of an asset) that ispledged to cover the repayment of the loan if the borrower fails to meet the terms of the loan.Common types of collateral are real estate equity, accounts receivables, and business inventoryand/or equipment. The key variables that often determine whether or not collateral is required ina business loan are number of years in business and size of the business. Three years is typicallythe minimum amount of time a financial institution will require a business to exist beforewaiving the requirement for collateral. However, when it comes to the size of the business, thiscriteria can be determined by number of employees and/or amount of revenue generated. Manylenders’ loan programs are designed to target certain sized businesses, so it is very important todo your research when it comes to potential lending institutions.Covenants: A loan covenant is a condition that a borrower must comply with in order to adhereto the terms of the loan. If a borrower does not meet the covenants, the loan can be considered indefault and the lender is given the right to demand payment in full. Lenders typically requirecovenants in a business loan to maintain loan qualify, keep sufficient cash flow, preserve theequity in a loan, to maintain capital structure in situations where this is a weakness, and to keepan updated portrait of a borrower’s financial performance and conditions. Common business loancovenants include proof of hazard/content insurance, proof of life insurance for the owner ormanager without whom the company could not contninue (lender is listed as beneficiary to coverloan amount), current taxes/fees/licenses, submission of updated financial statements of thebusiness (used for continuing assessment by the lender), and minimum financial ratios related toliquidity and profitability and leverage. In addition, the lender may prevent a borrower fromdoing certain things, including changing management or merging without prior approval,incurring additional debt, and eroding the net worth of a company through dividend payments orstockholder withdrawals (often limited to owners’ tax liability).Interest Rate: This the specified percentage that will be charged by the lender as payment foruse of the funds issued. These rates can vary depending on the length of the loan term, the typeof loan they are associated with, the amount of the loan being issued, and the credit rating of thebusiness applying for the loan.Personal Guarantee: When a lender requires the personal guarantee of the business owner, thatmeans that even though the loan is described as a “business” loan, the borrower’s personal credit
  • 3. history will be used to qualify for the loan, the activity of the business loan will be reported tothe personal credit bureaus through the business owner’s Social Security Number (SSN), and thebusiness owner’s personal assets can be seized in the case of non-payment. A personal guaranteeis still binding even if the business is corporation that is a separate entity from the borrower.Promissory Note: This is the document that describes all of the terms of the loan. Often theLoan Agreement and the Promissory Note are combined into one comprehensive document.Repayment Schedule: The required repayment schedule may dictate monthly, quarterly, orlump sum payments. However, some loan programs allow these payments to be deferred ordelayed in order to allow your business to generate cash flow.Representations: These are statements of fact or declarations made by the lender within the loandocument. One example of a business loan representation would be that all liens against thebusiness are disclosed.Restrictions: The lender may also place additional restrictions on the total debt a business agreesto incur, the amount of dividends or other payments to owners and/or principal investors capitalexpenditures, the sale of fixed assets.Secured Loans: Some loan programs may require a compensating balance to be held in a specialaccount as collateral during the life of the loan. These balance requirements can be any amountfrom a small percentage of the loan amount to the full amount of the loan. When all of the termsof the loan have been met and the loan has been paid in full, the collateral deposit is returned tothe borrower.Term: This is the period of time that covers the life of the loan. There is a wide variety of loanprograms that cover all kinds of different loan terms, so make sure that you apply for a loan thatmeets your immediate and long-term needs.Warranty: In the case of a business loan, a warranty is an assurance by one party involved inthe loan to the other that affirms that certain facts and/or conditions are true at the time of theloan or will happen during the life of the loan. Both the lender and the borrower are obligated touphold any warranties that are part of the loan and seek some type of remedy if the warranty isnot true or followed.Once a borrower understands all the features that can be included in a business loan, the nextstep is to research the various types of business loans that are available in order to determine thebest loan program for your needs.Collateralized Loans: It is very common for a loan program that is designed for smallbusinesses to require collateral in order to secure a loan. Simply put, this means that the financialinstitution that agrees to lend money to a business has the right to seize and sell the items that areagreed upon collateral in order to compensate the lender for any loss it might incur if a borrowerfails to repay the loan in full. Because of the ability to recoup its losses in case of default, acollateralized loan is much less risky for the lender and much easier to qualify for as a borrower,
  • 4. especially if there are any other weaknesses in your credit profile. According to the terms of theloan, the collateralized items must not be sold or transferred to another owner during the life ofthe loan. In certain situations, the financial institution may require physical possession of thecollateral during the life of the loan; however, it is very typical for a business to retain itscollateralized assets until the need arises to surrender the items to the bank in order to repay aloan that is in default.Installment Loans: These types of business loans require repayment over the life of the loanthrough a number of regularly scheduled payments. The term of an installment loan may be aslittle as a few months or as long as 30 years.Line of Credit: Often a small line of business credit is the first type of business loan that afinancial institution will agree to lend a small business with newly established credit.Unfortunately, just like with personal credit, often the first lines of business credit issued to anewly established business are extended at relatively high interest rates and may have somesignificant fees associated with the loan. However, once the business owner has demonstratedthe ability to make timely payments and ultimately repay the loan in full, the financial institutionwill be willing to increase the loan amount, decrease the interest rates, and reduce the fees.Seasonal Commercial Loans: These types of loans are ideal for businesses whose inventoryfluctuates from season to season. Typically the loan terms allow a business to borrow a certainamount of money during the time of the year when the company’s cash flow is lowest because itsinventory is low or being developed. According to the terms of the loan, the business has untilthe end of the season to generate income by selling their inventory and repay the bank.Small Business Association (SBA) Loan: The SBA does not typically deal directly with smallbusinesses when it comes to loans. Instead, they offer special financing and incentives to localcommunity development organizations and smaller financial institutions through governmentguarantees.Term Loans: These kinds of loans are the most basic commercial loans available. Typically,term loans carry fixed interest rates, monthly or quarterly repayment schedules, and a setmaturity date. Term loans are very appropriate for established small businesses that possesssound financial statements and a substantial down payment to minimize monthly obligations andtotal loan costs. Often, these types of loans are categorized into two classifications: intermediate-term loans and long-term loans. Intermediate-term loans usually run for fewer than three yearsand are repaid through fixed monthly installments or a balloon payment at the end of the life ofthe loan with repayment being fixed to the useful life of the asset being financed. On the otherhand, long-term loans commonly have a term of more than three years. Most have a termbetween three and ten years, with some long-term loans running as long as 20 years. Most long-term loans require the collateral backing of certain assets and require either quarterly or monthlyrepayment. Often, limitations on additional financial commitments are built into the terms of theloan, and they sometimes require a certain amount of a company’s profits to be set aside to repaythe loan commitment.
  • 5. What is an unsecured loan?An unsecured loan is a loan that is not backed by collateral or security. These loans arebased solely upon the borrower’s credit rating. As a result, they are often much moredifficult to get than a secured loan, which also factors in the borrower’s income. Anunsecured loan carries less risk to the borrower. However, when an unsecured loan isgranted, it does not necessarily have to be based on a credit score. It may be based onhistorical payment history on prior debt, reflecting in your credit score.Decision criteria for making unsecured loanSince unsecured loans are not secured against property or any asset, it is more difficultfor a lender to get their money back if the borrower defaults on the loan. An unsecuredloan has higher risk as compared to secured loan and hence has stricter underwritingrules. In particular, lenders will look at the potential borrower’s credit history and howthey have conducted their previous and current credit or loan accounts.Interest Rate determination.Interest charged on unsecured loans normally depends on the loan amount and level ofrisk. Generally speaking, the higher the loan amount the lower the rate will be and thehigher the risk the higher the rate charged.What is a secured loan?A secured loan is a loan that is backed by collateral. In the event that the borrowerdefaults, the creditor takes possession of the asset used as collateral and may sell it tosatisfy the debt. Secured loans relieve creditors of most of the financial risks involvedbecause it allows the creditor to take the property in the event that the debt is not properlyrepaid. On the other hand, debtors may receive loans on more favorable terms than thatavailable for unsecured loan. They can also be extended credit under circumstances whencredit under terms of unsecured loan would not be extended at all. They can also beoffered loan with attractive interest rates and repayment periods.Decision criteria for making secured loan.Since secured loans are secured against property or any asset, it is easier for a lender toget their money back if the borrower defaults on the loan. A secured loan has lower riskas compared to unsecured loan and hence has less strict underwriting rules. In particular,lenders will look at the value of asset used as collateral or security for the loan.Interest Rate determinationNo doubt, secured loans are always provided at lower rate than unsecured ones, it alsodepends on the credit score of the person asking for loan and the liquidity of thecollateral. Highly liquid collateral allows you to get secured loans on lower interest rates.
  • 6. Generally the interest rate increases as the liquidity of the security decreases. If a personhas a perfect credit history and excellent credit scores, the secured loans are provided atone of cheapest rates. Similarly, if a person has a bad credit history and low credit scores,he can get the secured loan after providing ample security, but the secured loan would beprovided at higher interest rates.Long term loans:Loans are considered as long term loans if they are for more than three years by thedefinition of most financial institutions. However, most long term loans are for more thanten years, and, in fact, can be as long as twenty years. A long term loan will generally beput up against collateral or security. Whether it is property, equipment, or some otherasset, there usually has to be something securing a long term loan. The rate of interest forshort term loans is never fixed arbitrarily. The magnitude of the loan amount, length ofthe payment period, records of the regular source of income of the person taking loan andhis collateral status are seriously counted prior to fix the rate of interest.Advantages of long term loans:• Long-term loans are usually available are cheaper rates. As long term loans are securedby collateral the lender charges lower interest rates.• Long term loam allows one to borrow large amount.Disadvantages of long term loans:• Long term loans are subject to interest rate fluctuations.• The total interest paid is substantially higher in case of long term loansShort term loans:Short term loans are designed for shorter repaying duration and therefore are not boundby long term obligation. Short term loans are obtained for a smaller amount as you needto repay it quickly and may be provided for any purpose including educational expenses,home improvements, auto repairs, clearing smaller debts etc.Advantages of short term loans:• Short term loans do not usually require collateral• Short term loans are made available in several days or even hours• Short term loans require little paperwork• Short term loans provide you with money when you feel a sudden unexpected need• With short term loans you do not burden yourself with long term obligationsDisadvantages of short term loans:
  • 7. • Short term loans are usually more expensive. As short term loans are not secured bycollateral the lender raises interest rates to cover the risk they bear with your short termloan.• The lender of short term loans is likely to investigate the credit history of the borrowerand it will be offered only when it is found satisfactory.• Short term loans are obtained for a smaller amount.