Credit & Lending Assignment

QUESTION 1:

In general terms, banking involves the business activity of accepting customer’s deposits at a small cost to the bank and then lending those funds to customers at a cost high enough for the bank to earn a profit. The business of lending is very risky, therefore lenders are encouraged to apply the principles of good lending or canons of lending. Though the canons of lending do not prevent the risks associated with lending it does mitigate risks involved.

To address the credit request of the Shepherds, the CAMPARI lending principles will be used since they have proven to credit set of guidelines used for making credit decisions.

Character

• The Shepherds currently has no relationship with the bank, they are customers of another bank.

• The pair is married and wishes to form a partnership to purchase a hotel.

• The couple has no relevant experience in management or the hotel business.

• Mrs. Shepherd has some experience in the restaurant trade. Adam is a freelance illustrator and has some experience in sales.

• Good long-standing customers of their bank in the south of England.

Ability

• Financial growth experienced under the existing sole trader owner

• No evidence to suggest the Shepherds are experienced enough to run a hotel.

• New venture will not be priority to Mr. Shepherd (Still wants to freelance)

Margin

• Margin will reflect the risks involved.

• The customer’s limited knowledge and experience shapes this request as very risky one.

Purpose

• The purpose facility is to finance the purchase of the Highland Country House Hotel in Scotland.

Amount

• Currently a £280,000 mortgage with their bank, which is valued at £530,000 and up for sale. Equity from sale and £100,000 to be used towards injection.

• Hotel on sale is valued for £590,000 but the Shepherds agree to pay £630,000.

• The customers are asking for £420,000; however a Bridging loan of £530,000 will be required.

Repayment

• According to the information supplied by the vender it appears that repayment is possible.

Insurance

• According to the information provided there is no detail on what will be offered as security.

Information to be Considered

• Risks associated with taking new business from another bank

• Little to no experience in the hotel / restaurant management

• From the information available it also appears as if the customers are going to require a Bridging Loan. This raises a lot of questions relating to timing, amount and the question of certainty.

• What will the security be? Will hotel be assigned as security? Will insurance be increased and assigned as security?