Language learning | English » Nagy Mária - Financing companies, The example of Granaco LTD

http://www.doksihu SZAKDOLGOZAT Budapesti Gazdasági Főiskola KÜLKERESKEDELMI FŐISKOLAI KAR KÜLGAZDASÁGI (ANGOL NYELVEN) SZAK Nappali tagozat Export-import menedzsment szakirány Financing companies: The example of Granaco LTD Készítette: Nagy Mária Budapest, 2005. május 6 1 http://www.doksihu CONTENTS I. Introduction . 4 II. Introduction of GRANACO Ltd. 5 III. The financing problems of enterprises and methods of solution . 6 1. Financing problems of GRANACO Ltd 6 2. Financing opportunities of enterprises 8 3. Financing opportunities of the Hungarian small-, and middle-sized companies . 13 4. Financing opportunities of GRANACO Ltd 18 IV. The process of crediting . 20 1. Claiming of credit: handing in the credit assessment datasheet 20 2. The process of credit assessment 20 1.1 The debtor classification. 21 1.2 Transaction-classification . 28 1.3 Coverage appraisal . 29 1.4 The qualification of GRANACO Ltd. 32 3. The credit construction employed

by GRANACO Ltd 40 1.5 Way of employment . 40 1.6 The obligations of the enterprise . 44 1.7 Cases of breach of contract . 47 1.8 Possibilities for legal remedy . 48 1.9 Advantages and disadvantages of the construction . 48 4. Credit monitoring 51 V. Alternative solutions to finance GRANACO Ltd. 52 1. Factoring 52 2. Overdraft credit 60 VI. Conclusion . 63 VII. List of tables and figures . 65 VIII. Appendix 68 IX. Bibliography . 79 2 http://www.doksihu I. INTRODUCTION The subject of my thesis is corporate financing demonstrated through the example of a concrete enterprise. Financing is the most important part of corporate management, being at the same time the greatest source of corporate problems. Though for different reasons, all enterprises have to face a kind of financing problem sooner or later, regardless of the size, income or other features of the company. In my thesis I tried to explore the reasons of financing problems at GRANACO Ltd. and find some

possibilities to solve them. In the first part I present a short introduction of the enterprise, focusing on the field of activity of the company. In the second part I describe the financing problem of the company, listing the reasons why the enterprise finally had to involve external sources. I also show the possible corporate financing methods, pointing on those that were also considered by the company, and also give some additional review of the factors that hinder such a small company in employing external sources. In the third part I present the process which resulted in ensuring the necessary capital for the company: that is the process of bank crediting. I focus my attention on the steps that are important from the company’s point of view, for example submitting the request, debtor rating. This is followed by the description of the credit construction applied for and currently used by the company, highlighting its advantages and disadvantages too. In the last part I

introduce some alternative financing ways, which the company should possibly consider. 3 http://www.doksihu II. INTRODUCTION OF GRANACO LTD The enterprise was founded in 2000 with two partners and a minimal amount of authorized capital. The name „GRANACO Ltd” was given the venture by the parties, thus referring to its portfolio of activities (the word „grana” comes from “grain”, while “co” comes from “company”). The wholesale trade of grain and fodder forage was nominated as the main portfolio of activities. At the beginning, the company dealt with the wholesale distribution of different fodder ingredients, mainly sunflower-seeds and soybean meal, occasionally corn, oats and lucerne pellet. A percentage of them was purchased from domestic suppliers, while the rest was imported from neighbouring countries, such as Romania and Ukraine, then from the Netherlands and Greece. Afterwards, the goods were sold to domestic wholesalers and retailers. During the next

years, the enterprise developed continuously, the turnover increased year after year. In 2003, the two founding parties decided to expand the portfolio of activities Exploiting the opportunities of the market and the capital accumulated in the preceding years, the venture started to deal with the distribution of edible oil made of sunflowerseeds. They purchase edible oil from Romania and sell it to hypermarkets The company does not have its own warehouse, it attempts to synchronize its purchasing and realisation processes. As demonstrated by the turnover records, the firm has proved itself to be successful in this branch of business, as well. Figure 1. The turnover of GRANACO Ltd., 2000-2004 2500000 2233572 000 HUF 2000000 1514773 1500000 Net income 1000000 500000 77469 0 2000 847647 529437 2001 2002 2003 Year 4 2004 http://www.doksihu During the last four years, the enterprise showed an incredible pace of development, since its turnover, as well as the number of

employees doubled. Owing to the expertise and suitability of the leaders, the future prospects are also advantageous. III. THE FINANCING PROBLEMS OF ENTERPRISES AND METHODS OF SOLUTION 1. Financing problems of GRANACO Ltd As mentioned above, the enterprise started to operate with a minimal amount of authorized capital. On the other hand, characteristically to each beginner enterprise, they already had to pay the occurring costs, such as costs related to the foundation of the enterprise, office rental charge, etc., before actually beginning to operate In addition to these costs, after the initial purchases of articles came the amounts with various volumes to be paid to the suppliers. The suppliers credit appeared to be the only opportunity for satisfying the demand for capital. It was based on the previously formed good personal contacts of the parties and on faith. It also meant a significant help, that the customers accepted the immediate or short-term paying, which made it possible

to cover the sundry expenses. But later on, the enterprise needed to adjust itself to the expectations set up by the professional circle against companies dealing with wholesale activities, which meant the condition of deferred payment to be provided for the customers. At that time, the enterprise attempted to agree upon such payment conditions, which could make it possible to cover the purchases by the incomes of realisations. The increasing demand for the products distributed by the company required the engagement of new suppliers, but the previously bargained suppliers’ credits were not possible to reach in their case; they set much more unfavourable conditions of payment. At the same time, customers were financed by the venture. The venture came under compulsion to make a decision: whether to increase the shareholders’ equity, or to involve 5 http://www.doksihu foreign sources. The question was laid special emphasis on after the company started the edible oil business,

because at that time it had to face even worse conditions of payment on both sides. The enterprise purchases the products directly from the producer, both the sunflower-seeds oil and the different meals. However, the production of oil is much more labour-intensive Therefore, while the payment condition of the meal was a few days after fulfilment, in the case of oil, advance payment was often required by the producers, thus shifting the responsibility of financing the production process onto GRANACO Ltd. Besides the costs of production, producers were motivated to do so, because of the high costs of getting credit abroad. In Romania for example, the interest rate of a credit is approximately 14% and it does not include all the costs in connection with the appropriate construction. On the contrary, GRANACO Ltd. managed to obtain a credit with a total cost of circa 11% In praxis, this meant that the venture had to obtain a significant amount of money in a short time. In the case of the

first purchase of articles, the amount concerned was available for the company; however, it also turned out, that in the long run it would not always be like this. There was an attempt to achieve more advantageous payment conditions at the producers in order to be able to cover the counter values of the articles by selling the products quickly. At the same time, it was also tried to encourage the customers to perform payments with as short due dates as possible. However, the attempts were not successful, none of the parties wanted to accept the more disadvantageous conditions. Consequently, the suppliers still required advance payment of large amounts, and the customers wanted deferred payment with as long duration as possible. The fact that the enterprise possessed two suppliers but several customers made the situation even worse. On the one hand, the outstanding debts are much more difficult to collect from more customers, on the other hand the disharmonious payment conditions and

deadlines are hard to synchronise in such a way, which could ensure the availability of the entire amount at the required time. And it shall also be kept in mind that besides the ones mentioned above, there were further expenses to be covered by the company. 6 http://www.doksihu The availability of the required amount was not the only thing, which had to be weighed by the venture, but there were further aspects to be considered, as well. The difficulties caused by the advance payment are clear for the producers, as well; therefore, they attempt to make offers which are advantageous also for the customer. In the case of advance payment, they might offer lower purchase prices; however, it is not always worth for the enterprise to accept it. In the case of deferred payment, the amount concerned can namely be invested until the deadline expires. Nevertheless, the exchange rate risk had to be considered, as well. Since the supplier is a foreign company, the contract was concluded in

dollars Therefore, before accepting the advance payment, the consideration of the possible measure and direction of the change in exchange rates is needed, because in the case of a disadvantageous change of them, the advantage originating from the lower price can easily disappear. The exchange rate risk should not be left out of consideration also because the customers honour their bills in Hungarian forint. The advance payment contains the risk of non-performance and that of performance not as per contract, too. A certain part of the risks mentioned can be avoided by applying various guarantees built into the contract, but if for example the partner company goes bankrupt, the amount paid in advance will be lost. Fortunately, in the case of GRANACO Ltd., losing the amount of payment has quite little chance, as the suppliers possess assets that worth several million dollars. Despite, these risks had to be taken into consideration by the enterprise. The price offered was so attractive

that the company finally accepted the offer. The request of the suppliers for advance or short-term payment and that of customers for deferred payment made it unavoidable to draw in further sources. 2. Financing opportunities of enterprises 1 If there is a need for capital inflow, the enterprises can choose between two basic opportunities: they can rely on their own capital (internal finance), or use foreign resources (external finance). 1 Dr. Sóvágó, Lajos: Credit assessment (Hitelbírálat), Unió, Budapest, 2001 7 http://www.doksihu a) Internal finance In the case of internal finance, the enterprise utilises the capital created by itself. It consists of the different reserves (accumulated profit reserve, capital reserve), the market incomes and the retained earnings in the given year. Financing from reserves During the operation of the enterprise, the net profit produced each year or a certain part of it will either be paid out as dividend, or it will be reinvested. The so

accumulated profit reserve can be used as an internal resource for financing the further development of the company, but it can be invested, as well; or if the enterprise is not that successful, its operation can be solved with the help of it. Actually, if a company did real internal financing, that would mean that all projects and investments are carried out by using retained earnings. However, small-, and middle-sized companies are rarely able to realise it. Financing from market incomes This means that the expenses of operation are covered by sales revenue. The sales price of different products and services has to contain at least the expenses of production and distribution and the expected profit of the given enterprise. Insofar the expected sales revenue is realised, the so called “internal financing from market incomes” can be carried out. The majority of the incurred expenses mean a real expenditure of money with the exception of the accounted depreciation allowance, which

does not create a real flow of money. In this way, the enterprise can acquire such a resource, in connection of which no expenses occurred. Since the coverage of amortisation also appears in the income, in this way this amount of money can be assigned for financing the enterprise, essentially for financing the replacement of the consumed tangible assets. Financing by the retention of earnings in the given year The annual net profit produced in the year under review or a certain part of it might be paid out as dividend, or, - corresponding to the long-term goals of the enterprise - can be assigned for financing developments, building up stocks and covering loans. The balance sheet profit figure corresponds to the profit-side cash-flow, inasmuch as the net income for the given accounting year will not be distributed between the owners of the enterprise, but 8 http://www.doksihu according to its long-term interests and also having an eye on the goal of increase, it will be

reinvested. b) Foreign finance However, it is not essentially required to finance the whole operation of a company with its shareholders’ equity. In many cases, it is not sufficient for continuing the business activity, or simply the enterprise is not in possession of the amount of capital required to satisfy its liabilities. In other cases, such situations might occur, according to which it is more advantageous to engage foreign capital to be able to carry out financing (for instance a part of shareholders’ equity is invested in other ventures). External financing can essentially be divided into three main groups: stake, long-, and short-term financing. Stake financing In the case of stake financing, the enterprise which has lack of funds acquires new resources by introducing the capital of new stakeholders. The participants find each other by appearing on the capital market, for example by launching and buying new shares. The enterprise is motivated by capital introductions,

and the essential motivation of the investor is the expectable profit, which is the return of the capital invested. In many cases nevertheless, the new owner was also a competitor on the market; therefore, besides attaining profit, he/she also wants to acquire a governing role in the economic management and business administration of the competitor. It also occurs that such an external financing source is accompanied by the annexation of the acquired company, the takeover of its markets, or finally, the elimination of the enterprise. A further purpose of investors can be the admittance into a market which was unattainable for them before, and the strengthening of their position. This is the reason why enterprises do not prefer the use of this financing source. Stake financing generally means obtaining final capital for the enterprise, it can steadily count on that, and from the point of view of enterprise financing, it behaves like an own resource in the future. Corresponding to the

form of organisation, procurement of capital can be carried out by increasing the shareholders equity or by that of the authorized capital, or by buying a share. 9 http://www.doksihu Financing from long-term loan Another form of external finance is taking a loan. Dividing the external capital into short-, and long-term payment obligations is a determinant factor, as far as the liquidity of the company is concerned. It characteristically means capital allocation for a predetermined period with the obligation of repayment. The capital providers do not require proportions of property, but the expenditure of loan is the highest compared to all other possible sources. According to the expiration, the foreign capital can be medium- and long-term loan, as well as short-term loan. Their most important feature is their field of utilisation: middle-, and long-term loans are allowed to be applied for financing developments and investments, while in the case of short-term loans, the field of

utilisation might be the financing of current assets and that of ongoing production. The long-term foreign capital is available for the company for more than a year. It makes possible for the venture to finance long-lasting investments by the long-term foreign capital. Financing from short-term loan For the enterprise, the short-term foreign source generally means a source (obligation) expiring within a year, and it is required to continue the entrepreneurial activity. During their operations, for shorter or longer periods, the enterprises use the money of another enterprise, financial institution or their own employees; who quasi give the money required for the operation in advance, with other words, lend it to the company. As mentioned earlier, the short-term foreign source of money might come from the advance payments of customers, and ensures short-term foreign capital for the enterprise, since its customer pays a proportion of the counter value of the good or service before the

agreed date of fulfilment. The customer essentially provides a credit, since the product, which the deposit was already paid for will only be delivered later, while the other party does not need to use its own capital or a bank credit in order to be able to perform its own activities. However, the transactions cannot only be financed by advance payments of the customers, but by the loans provided by the suppliers, as well. This means that the supplier already 10 http://www.doksihu performed, the enterprise received the purchased product or employed the service, but the invoice of it will be settled at a later time. This is also called commercial credit Further possible sources are the accrued expenses. These are liabilities available for a defined period and to a defined magnitude for financing current assets. To this group belongs the payment of the employees’ salary, since the employee gets it following the month under review, or taxes and social insurance contribution paid to

the tax authority. The enterprises might possess the money required to fulfil their payment obligations before the due date, but they will only pay on the day of expiration taking into consideration the time value of money. Short-term foreign capital resources might come from other obligations, as well; such as from the default interest, and the amounts withdrawn from employees and transferred elsewhere. Last but not at least short-term credits and loans must be mentioned, which are necessary when the external capital named so far is insufficient to finance current assets. Companies need short-term credits in order to fill up their current assets base periodically: in most cases, the reason is that they either need to purchase goods or any of their debts (tax, salary, public utilities, etc.) became due, and the suddenly occurred money requirement cannot be settled by cash. Anyway, keeping a large amount of cash is not practical either, because it does not yield interest, while the

very liquid securities, which can be converted into money anytime, ensure very low yield under normal conditions. Therefore, while purchasing goods, companies attempt to get articles, which can be raw materials, semifinished, or finished goods, possibly on a credit with an expiration of several months, thus having the requirement of only a minimal amount of cash. However, this is also a case when there is a need for considering the fact that on the one hand, the interest-free commercial credit also has its “price”, since here the interest is calculated into the price, and on the other hand, in the case of such credits, probably the seller of the article is in need of bank credit. Consequently, the enterprises can rarely cover their expenses by their incomes without maintaining a large amount of cash (for which they often do not have opportunity at all), therefore they are often in necessity of taking short-term loans. 11 http://www.doksihu 3. Financing opportunities of the

Hungarian small-, and middle-sized companies 23 Before coming to the point of demonstrating the financing opportunities which were considered by the company, I would like to show shortly the situation, the financing opportunities and the relation to the banks of the small-, and middle-sized companies in Hungary. I attach importance to that, because on the one hand, the venture is also a part of this corporate layer, and on the other hand, in this way we can get answers to many questions, for instance: Why do not the banks like to undertake the finance of small-, and middle-sized companies; why do they subject them to strict risk analyses; and why are those companies - being already in a more disadvantageous financial situation - debited by higher interests? Characteristically, at the beginning, enterprises lack capital, they would require additional inputs. In addition to increasing their own sources, they have the opportunity to issue debentures or shares, they can turn to

development or investment corporations, venture capital companies, different banks, and cooperative credit associations. Since 2004, the subsidies provided by the EU are also available. All this would allow us to get to the conclusion that the enterprise only needs to mark the source it wants to take advantage of and the required capital is available right away. However, it is not so simple. Each possibility has its own advantages and disadvantages Issuing debentures or shares is for instance almost impossible for the small-, and middlesized companies, since it is unlikely that they find a client well-provided with capital to buy their securities. A frequently occurring problem is the lack of information, which means that the enterprises are not aware of the possibilities available for them and the way of employment, for example in the case of subsidies provided by the European Union. A part of them can only be employed in special cases, for example for financing investments. And some

of them set such conditions to enterprises, which are impossible to fulfil. As an example we could mention the constructions offered by commercial banks, which lay unrealistically high interest expenditures on the small-, and middle-sized companies; Lőrincz, Vilmos: Banks about small enterprises (Bankok a kisvállalkozásokról), Cégvezetés, 2003. november 3 Szűcs, Gábor: The economic environment – through the eyes of entrepreneurs I. (A gazdálkodási környezet – vállalkozói szemmel I.), Cégvezetés, 2005 február 2 12 http://www.doksihu another example could be the venture capital companies at which the interest expenditures would be impossible to produce by the ventures before the expiration of the given due date, and these venture capital companies require proportions of property in the enterprise concerned. Knowing all this, it is understandable why enterprises can principally be characterised by a large amount of suppliers’ credit, which is the cheapest way of

financing nowadays. Collecting the prices of commercial credits and the additional charges are namely almost impossible for small-, and middle-sized companies, because the provisions of law do not take the punishment of the expired outstanding debts strictly enough. On the other hand, small enterprises do not have enough economic strength to stick to the default fee, which they would be entitled to get by law, without the risk of losing their partner. In addition to the suppliers’ credit, another beloved way of financing is the employment of constructions offered by banks. A survey made with banks flashes a beam of light on the fact, that in most of the cases the small-, and middle-sized companies take overdraft and current assets credits. The reason of this is that they are mostly in contact with large companies, which – by abusing their dominant position on the market – define disadvantageous payment conditions for them. Out of the article announcing the survey it also turns

out, that in many cases the small enterprises would not be able to operate without short-term credits. The small-, and middle-sized companies also frequently turn to banks for investment credits, and the bank guarantees are popular, as well; first of all in the finishing, and building industry. Despite the credit facilities which are more and more available also for the small-, and middle-sized companies, the majority of small enterprises do not turn to banks, because they do not possess appropriate familiarity in the field of drafting an application for a loan, while employing a firm specialized in this is very expensive. In addition to the fact that the small-, and middle-sized companies are often not aware of the possibilities which can be employed, the subsidies provided by the EU remain unutilised for the same reason. The high interests and other banking charges do not act as encouraging, either. Despite the opportunities provided by other institutions, the primary role of banks

in corporate financing is unquestionable. Banks started to deal seriously with the small-, and 13 http://www.doksihu middle-sized companies only in the last couple of years, which was reasoned partly by the possibilities being inherent in them, and mostly by the fact, that the market of large enterprises was already divided. Despite, banks have different opinions about small- and middle-sized companies. Actually, following some conversations with bank administrators, I heard good and bad opinions, as well. Some of them stated that small- and middle-sized companies are good partners, as well; but I met some who reinforced that what follows is really true. In fact, I do not want to take sides, all I experienced was that it is quite difficult for these companies to get a credit. In the following paragraphs, I just would like to try to find the reasons of it. The fact that the small-, and middle-sized companies play an emphasized role in a number of fields of the economy worldwide, is

acknowledged by the banks, as well. Such fields are for instance the employment, the manufacturing of products for public use, the satisfaction of services and the innovative process. According to the estimation of the Central Statistics Office (KSH), in the year 2003, 42% of the gross domestic product (GDP) was produced by small enterprises and 15% of that was provided by middle-sized companies. In 2002 there were 21700 small enterprises and 5614 middle-sized companies in Hungary, and their number has moderately increased in the last few years. Their role in employment possesses significant importance: in 2003 middle-sized companies provided work for 22%, and small enterprises for 19% of the employed. Besides all of these facts, the small-, and middle-sized companies struggle with a lot of problems, which can be the reasons of why their loan applications are rejected. One of the problems is their possession of not enough own capital. The small-, and middle-sized companies would often

be inoperative without bank credits, on the other hand, since they do not have sufficient own capital, the extreme indebtedness accompanied by incidentally more disadvantageous course of business might result in the insolvency of the company. The cyclical decline that has been perceptible since 2001 did not have beneficial effect on their capital endowment, either. In the first year of the cyclical decline, in 2001, they adjusted themselves to the conditions, which had become more disadvantageous. By the year 2002 however, their reserves exhausted, their stocks decreased to the minimum, and their willingness to invest was low. The companies only started to improve in the following years, but despite of this, their lack of capital consolidated. This fact appears 14 http://www.doksihu most of all in the low degree of the enterprises’ resource supply, in the field of their opportunities for investment and development and in their profitability. The depressed prices which are the

consequences of the negative processes of the Hungarian economy in the recent past, the low efficiency of the channels of distribution, the scarce application of marketing and the technical difficulties accompanying the lack of developments are all such things which affect the wide range of small enterprises particularly disadvantageously. Their development is also restrained by the fact, that the domestic demand for their products and services is inadequate, and they have to compete with the imported goods which are more advantageous as far as the quality, design and price position are concerned. Their distribution on external markets is not considerable, their participation in the total export in 2003 was just above 10%. However, the process does not end here. The severe competition and the inadequate demand prevent the increase of their incomes and sales prices. Their competitiveness could be improved by developments, technological innovations and investments. This is -

of course - accompanied by additional expenses, credits and borrowings, which are continuously postponed by most of the enterprises, due to the high interests or in order to avoid insolvency. It is also a frequently occurring thing, that their loan applications are rejected by banks. The circle actually is closed here, since the enterprise does not get opportunity to settle its financial problems, for example to implement an investment which would increase its incomes or will be profitable in some years. In this way, its situation will not improve, what is more, it will worsen further, and later on the enterprise can definitively say goodbye to getting a credit. A frequent problem is that the available coverage is not in accordance with the amount of the credit applied for. The owners often offer their private properties as coverage, which is not gladly accepted by the banks since the acquisition of them carries too many problems. In this way, a kind of forced lending emerged, the

essence of which is that banks provide only that amount of credit for the small-, and middle-sized companies which surely returns from the coverage. That is also a fact that in the case of the majority of the small-, and middle-sized companies, the market is constituted by one or a few supplier, or customer relations. This 15 http://www.doksihu possesses the danger that in the case of the elimination of the relation, the revenue of the enterprise decreases, or it even can get to the border of bankruptcy. Banks try to defend against this risk by requiring the companies to hand in a photocopy of their contracts, or they can investigate the functioning of the given relation retroactively for more years, and they can also ask the customer’s/supplier’s opinion about the company concerned. However, sometimes the banks’ objections are raised not against the factual, by numbers expressible data of the enterprises, but against the behavioural culture of the owners. A characteristic

thing to the corporate layer is for example, that after taking a loan, they attempt to disappear from the horizon of the bank. A frequent example is that an owner possesses several similar-sized enterprises which he or she chooses different banks for, thus splitting up the information. Banks also protest against the fact, that in most cases the ventures are not able to prepare the application for the loan on their own, or if yes, then with a lot of mistakes. In many cases they employ companies dealing with this. However, these companies are not interested in forming a long-term relation between the enterprise and the bank, and they do a job with a quality corresponding to this fact. An additional characteristic thing is the tax avoiding behaviour and the lack of appropriate business planning. Consequently, one reason of the fact that banks do not readily provide credits to small-, and middle-sized companies is the measure of risk related to the transaction. A further reason for the

wrong connection is that in the case of credits with magnitudes of more hundreds of millions taken by large companies, banks have the same amount of work as in the case of smaller transactions, but the profit of them is much larger. The already complicated administration is made further more difficult by the fact that the loan application forms are frequently filled in defectively by the enterprises, data being important for the bank are left out, and the business plans of them are not reliable. The widespread hypothesis among banks saying that the number of problems coming from the non-repayment of the credit more and more decreases as the size of the company increases makes the situation even worse. 16 http://www.doksihu On the basis of the facts mentioned above, the following summary could be taken concerning the situation of the Hungarian small-, and middle-sized companies. The small-, and middle sized companies play an emphasized role in a number of fields of the economy, at

the same time, due to the fact that they have such a high turnover that significantly exceeds their capital supply, they are characterized by a steady lack of capital. This is one of the reasons, why banks do not provide credits for them gladly. The small-, and middle sized companies often do not exploit the arising opportunity, because banks impose unrealistically high interest expenditures for them. In this way, a strange situation emerged: the highest interest expenditures are to be paid by the ones, who can bear it the least of all, that is by the small-, and middle sized companies struggling with financial difficulties and having lack of capital. It turned out even of this small part, that there is still a lot to develop in the field of financing small-, and middle-sized companies. The banks do not provide credit gladly, the enterprises do not take it gladly, at the same time however, the cooperation is in the interest of both of them. For the companies the stake is the ability to

operate, and for the banks, it is the larger range of customers. 4. Financing opportunities of GRANACO Ltd As mentioned above, the company possessed the following financing problem: the increased demand for different meals required to switch in further suppliers. Owing to the fact that the company was unknown for them, they imposed short-term payment conditions on the company. In the case of edible oil, the producers often required advance payment At the same time, customers insisted upon deferred payment. As a consequence, the company required capital inflow. There were several possibilities for financing. First of all, the company attempted to achieve better conditions - longer period of payment – by the existing suppliers, but did not succeed. Thereafter it investigated the internal financing possibilities However, the shareholders’ equity of the enterprise proved to be insufficient, as a consequence of which the enterprise had to consider the involvement of external

resources. The company gave a thought to the possibility of capital increase, but the owners did not have enough capital to carry that out. 17 http://www.doksihu As another possibility, issuing shares or bonds offered itself, but it was not possible due to the capacities of the enterprise: it would have been difficult to find a capital-intensive client to buy the securities issued. On the other hand, we shall also keep in mind that the possessor of the share is also entitled to participate in the administration of business. And a small-, or middle sized company does not gladly reveal its market, consisting of mainly a few participants apart from competitors. The company thought about taking in a new owner, as well. The advantage of it is that a certain amount of capital would be ensured for the enterprise, so the current assets would be expanded. Besides all of this, however, it would have a number of disadvantages, as well, as far as the enterprise is concerned. The new owner

shall namely also be involved in the corporate management in the same way as the old ones, which would result in the fact that the hands of the old owners would be tied to a larger extent than before. Therefore, in the case of an enterprise which has been operating well for a long time and possesses a team of managers shaken together well, it is not sure that this is the best solution for drawing in new capital. In the light of all the facts mentioned, at the beginning of 2003 the company decided for bank financing. However, a number of factors made the borrowing difficult First of all, due to the fact that the company is a small enterprise and a distributor, it possesses neither considerable technical appliances, nor valuable real estates, nor goods on stock, which could be offered as coverage. It does not have securities and large amount of foreign exchange deposits, either. The next difficulty was to choose the construction which would be the most convenient considering the

interests of the company. The most important question was, whether banks provide a construction developed specifically to solve such problems. If yes, the most advantageous shall be chosen after considering the most important aspects; if not, there is a need for examining the question, which construction would mean the most optimal solution? 18 http://www.doksihu IV. THE PROCESS OF CREDITING In this part of my dissertation I would like to explain the process that finally resulted in the solution of the company’s financing problems. 1. Claiming of credit: handing in the credit assessment datasheet After the decision was taken, that the enterprise attempts to supplement the capital available by taking a bank credit, the executives visited a number of banks to find the most adequate construction. However, before giving an offer to an enterprise, the bank puts it through a detailed analysis. It has many reasons On the one hand, in order to be able to choose the most suitable

product for the enterprise, the bank needs to know the abilities of it. On the other hand, during the analyses, the bank attempts to survey the measure of the risk to be taken, as well. In order to get familiar with the capabilities of the enterprises, banks use a so-called credit assessment datasheet, which contains questions concerning the financial status, the supplier, and customer contacts and the future plans of the enterprise. Besides this, companies also have to hand in the followings: the annual report of the last two years, the closed trial balance of the last quarter, and certificates given by the Hungarian tax authority (APEH), the National Health Service (TB) and the Customs authorities (VPOP) not later than sixty days. Considering the possibilities and the expected costs presented during the first discussions, the enterprise decided for Raiffeisen Bank Plc. The datasheet that was filled in and then handed in by the company was as per Appendix 1. Out of the other

documents prescribed by the bank I would like to highlight the profit and loss account and the balance sheet (as per Table 1.-3 in the List of tables), on the basis of which banks prepare the analysis of the company. 2. The process of credit assessment 4 The decision upon the acceptance or rejection of the application is taken after considering three factors. These are the debtor classification, the transaction classification and the coverage appraisal. 4 Dr. Sóvágó, Lajos: Credit assessment (Hitelbírálat), Unió, Budapest, 2001 19 http://www.doksihu 2.1 The debtor classification The name, debtor classification, means the exploration and judgement of a company, made according to defined aspects of general-, and special economic conditions. During the debtor classification, the measure of the deviations of the company’s equilibrium parameters from the equilibrium is determined. It consists of three parts, which can be logically separated: the classification system, the

diagnostic system and the qualification scales. These three parts always appear as a homogenous system during the process of carrying out the concrete qualifications. During classification, the weight of each element of diagnostics has to be determined. During the diagnosis, analytical investigational elements are applied. Finally, in the phase of qualification, the rating process takes place Although the systems of debtor ratings applied by the individual banks differ from each other, they are identical as far as their fundamental principles and legal frameworks are concerned. In 1994 the then existing Governmental Banking Authority put together the list of compulsory and recommended requirements of debtor qualification, which resulted in significant changes in the system of debtor qualification applied by the Hungarian commercial banks. Such changes were for example the harmonisation of the aspects and index numbers employed to judge the financial situation and the future liquidity

of the applicant; the standardisation of the internal rules relating to the process of debtor qualification, and the way of utilisation of the statements acquired during the qualification. Despite of these regulations, the methods of qualification engaged by commercial banks do not correspond to each other. There are several reasons for this The most significant deviation can be observed in handling the size of companies. A further deviation is that in some cases the absolute level of the indexes is graded, in other cases their changes. Besides this, there are significant deviations in the itemisation and weighting of market risks. In the developed market economies and in the specialist literature dealing with this topic, the so-called 5C method can often be met. This method collects the information needed about the debtor under keywords starting with “C”. The keywords are the followings: a) Character (the character of the debtor, its willingness to pay) On the basis of the

relating observations, the question whether the debtor wants to pay at all can be answered. The willingness to pay can be observed in terms of the whole enterprise, but it can be aimed only at the management or the owner, as well. 20 http://www.doksihu When qualifying the character, the bank examines first of all the connection established with the customer. Important questions are for example: How long has the accounting and credit contact been existing? Does the enterprise have any other connections with other banks? If yes, what are they like? It is good for the company if the credit contact is uninterrupted and it always fulfils its obligations accurately. The account turnover and the willingness for cooperation are also to be appreciated. b) Capacity (ability to pay) The most important part of the credit rating process. It is aimed at the exploration of the question, whether the debtor will be able to pay back its credit. It includes the analysis of all those factors, which

can modify the income of the enterprise and which can be influenced by the firm. The bank can for example analyse the internal structure of the organisation. The wellformed processes, the competences in decision-making and the relations among them are namely determinative factors regarding the operation of the enterprise. The structure of owners might provide important information about the company, as well. There are important things to know about the owners possessing a relatively high proportion of the shareholders’ equity, for example the exact rate they possess in the given enterprise, as well as the measure of share acquired in other firms. In order to learn more about the assumable connection points, there is a need to get information concerning the activities, financial strength, termination of shares, and so on of the other enterprises of the owners. For the same reasons, the dependence connections of the associated companies shall be clarified. The bank requests extra

information about the internal structure and the structure of owners of the organisation in written form. The professional reputation of the management is also an important part of the investigation. Its basis is the adequate qualification and the experience of the management, and the strategy represented by them. A company having for example the following features can achieve advantageous result: it has a determined strategy; its leaders are qualified and possess professional know-how; they are experienced and skilled in the field 21 http://www.doksihu of financial affairs; they are characterized by reliability in business life and in bank relations; and they are associated with corporate goals. To be able to judge this aspect properly, it is of high importance to have regular personal contact with the credit administrator. The future prospects of the company and the quality of plans are of key importance for the bank. During their analyses, it is very important to know the

firm’s realistic situation in the economic environment, and the way the company can estimate it, how the company is able adjust itself to the contingent changes. The planning can be described as good, if the goals determined are based on information corresponding to the reality, concerning both market possibilities (competitors, range of products), and internal resources (machine capacity, labour force, financial resources). To judge the future prospects and performance targets there is a need to revise the business plan and the cash-flow plan of the company, considering their acceptability and feasibility. In all cases of company qualification, it has to be examined if the products produced by the company or the services offered are competitive, since this is one important term of the creditworthiness of the company. On the basis of the net income achieved, the venture’s commodity structure and its competitiveness can be judged. Besides all of these, the bank also analyses, how

much the products correspond to market demands, whether they are mass products or customised ones, what the quality of the products is like, what the customers’ behaviour related to the product is, what the marketing, and advertising activity of the company is like, how many orders came for the product, and so on. The sources of information required, in addition to the database called in from the enterprise, might be the various sector analyses, market reports and external information (stock market reports, bank references, opinions of business partners, etc.) Besides the ones mentioned above, commercial banks might consider other factors, as well; for instance the enterprise’s portfolio of contracts, the statistics about the company, former financial data, reports. This aspect of debtor qualification possesses the largest diversification in the praxis of banks. 22 http://www.doksihu c) Capital The capital ensures the operation of the enterprise, and in the case of

liquidation, it ensures coverage for the liabilities of the company. Capital and capacity are connected to each other from a certain point of view, since if the enterprise possesses a significant amount of capital, its capacity can only be restricted by its character. At the same time, the factors mentioned above influence not only the capacity, but the formation of its capital, as well (for instance: product policy, experience of the management in financial affairs). The short-term bank loans increase the amount of the company’s working capital, which means that contrary to commercial credits, not a certain transaction, but the whole corporation is financed. In the case of global corporate financing, the financial situation of the entire company is the main thing, and not the recovery prospects of one or several transactions. Contrary to project-financing, where the creditors investigate the future of the project, in this case, the effectiveness of the company’s operation in the

past is the object of the analysis. This is used to make forecasts for the future, which means forecasts analysing if the debtor will be able to pay back the loan within a year. Examining the „past” of the company is carried out by the analysis of the financial statements, first of all the balance and the profit and loss account of the company. Since the balance shows the financial status of the company at a given point in time, having only the balance data of one year is not sufficient. Consequences must be drawn out of the data of minimum 2-3 consecutive years. As the basis of calculation, either the balance data of the 31st of December of three consecutive years, or - in cases when the credit is given in the second half of the year - the balance data of 31st of December of two consecutive years and that of 30th of June are taken. A frequently occurring case is that the balance data are not enough for the bank. In such cases, they make a list of additional data (for instance

credit items, leasing, secular outstanding debts divided into expired and not expired items), which are called in together with the balance data. Out of these data the financial status of the company, its earnings, liquidity, future prospects, and its financial management are interesting for the bank, in order to determine the creditworthiness of the corporation. Concerning the balance, banks are particularly interested in: 23 http://www.doksihu − the development, and current size of working capital, measure of liquidity, − the development, composition and size of current assets, − the composition, development and current status of short-term debts, − the size of stocks; the potential possibilities for selling them; the velocity of circulation, and the size of unsaleable stocks, − the size of capital invested in other corporations; its relation to the amount of assets; their profitability, − the changes of the current liabilities, their composition and measure, − the

proportion of short-, and long-term liabilities, − the proportion of own and external capital, − the composition of the shareholders’ equity. The bank takes into consideration the profit and loss account of the company, as well. It provides information about the profit obtained or the loss made by the firm. While the balance reflects the health of the company on a given day, the profit and loss account informs about the good or wrong operation during the year, and provides essential data for the investors. This is also a case, when the data of at least 2-3 years have to be compared On the one hand, bank analysts compare the ratios against those of the previous year, on the other hand, against the ratios achieved by others in the same year, in the same economic sector. Concerning the profit and loss account, the banks are particularly interested in: − revenue coming from the main activities of the firm, − revenue coming from other business activities, − development of

costs related to production, − operating costs without amortisation and interests, − operating profit without amortisation and interests, − measure of amortisation and interests, − operating profit, − subsidies from the budget, − profit before paying tax, − net profit, 24 http://www.doksihu − development of cash-flow, − export revenues. The bases of the financial analyses are the financial ratios, which are virtually quotients formed out of the data above, making the pure numbers more expressive and more appraisable. They are used by the enterprise to inform the management and to make various statistics; and by the banks to determine creditworthiness. The system of financial indicators applied to make comprehensive assessments of the performance of economic units and the interpretation of these indicators were internationally unified. Before the introduction of the two-tier bank system, the Hungarian National Bank (MNB) already offered to the financial

institutions three modern indicators used generally by the World Bank, in order to judge corporate creditworthiness. The first one is the liquidity ratio, which shows the value band, inside of which the value of the company’s current assets can decrease without causing payment problems for the company. The required minimum value of this indicator is usually 2,0 However, it cannot always be enforced. The value depends for example on the character of the sector and on their business prospects. If the bank survey confirms that the velocity of circulation is high and its debts can quickly be collected, lower values (for example 1,5) can also be accepted. The so-called acid test ratio is also frequently used instead of the liquidity ratio. If this ratio is low, while the liquidity ratio is high, a deeper analysis is needed. In this case, the stock level of the company is high, the reason of which can also be the accumulation of unsaleable stocks. According to a general rule, the acid

test ratio shall be 1,0 The second important index is the capital supply index, which is the quotient of the shareholders’ equity and total liabilities. It can be considered as advantageous, if the proportion of the own resource is higher, since the lower value of the index can refer partly to indebtedness, partly to higher interest payables of the external resources. If the value of the index is too high, it refers to the fact, that the management is not enterprising enough, does not use the boosting effect of the inflow of external capital. This ratio is given in percentages, which usually falls between 30% and 70%. 25 http://www.doksihu The third index given by MNB is the ratio of debt service, which provides an answer to the question, how much does the sum of net profit, accounted depreciation and the interests on long-term credits provide coverage for the long-term capital, and interest payments due in the period. The real coverage of the debt service is the surplus of

business assets, which remains after fulfilling the different obligations. In order to possess adequate creditworthiness, it shall be between 1,5-2,5. Regarding the financial indices, the regulation applying to the commercial banks is not uniform, either. So banks have the possibility of analysing several other indicators, as well; such as the measure of operating capital, profitability, efficiency, cash-flow, and so on. d) Conditions This means the examination of the external environment of the company. This is the environment in which the company operates. Its analysis consists of the country and the sectoral risk, and the competitive environment. The country risk occurs, when the capital crosses the state borders. The risk is that the customer will not pay its debts owing to rather macro-economical, than micro-economical reasons, and this risk emerges in addition to the usual risks. In the case of the company, this risk does not affect the bank, since the enterprise is registered

and operates in Hungary. One of the most important aspects of crediting is the sectoral classification. Certain sectors are regularly above the average profit returns for longer periods, while others are not even able to reach the average level. The participants of a given sector are subject to similar effects, out of which the most important is the business cycle of the sector. Therefore, when analyzing the customer, the bank needs to know the specific features of the sector, as well. The features of the sector are determined by the followings: the actual situation of the sector, the changes concerning its future, the affect of the cycles, the intensity of competition, various indicators and growth trends, the diversification characteristic to the sector, the limits of entrance into the sector and the measure of intervention by the supervisors. 26 http://www.doksihu The analysis of the competitive environment is of particular importance in the process of determining the limits of

debtors. The position possessed by the enterprise on the market, how much it is affected by the changes taking place in the economy, has a significant influence on its creditworthiness. The following factors are usually considered by banks: the level of management, the size of assets, the stability of the company, its prospects, the connection between the bank and the firm, the situation of the economy and that of the market. e) Collateral Before determining the measure of the coverage required, the bank summarizes the results of the debtor, and the transaction classification. Before outlining the main information related to the coverage, I would like to present the main aspects of transaction classification. 2.2 Transaction-classification During the operation of commercial banks, there is a need for detailed determination of not only the customer-, but also the transaction-related risks, and they need to be qualified, as well. The reason of this is that the creditworthy customers

often want to settle too risky transactions with doubtful outcomes, and the customers judged as ones with weaker abilities apply for credits with lower risks. The behaviour and flexibility expected from the commercial banks requires, that in the first case the bank rejects, in the second one it accepts the application for credit and makes the credit payable. However, to be able to perform this, the classification of the possible transactions is essential. The transaction classification is important not only because of the transactions to be financed, but also because of the special requirements related to the type of credit serving them. Such requirements are attached to the credits provided by the governments and international financial institutions out of money funds with accurately defined range of utilisation. The transaction classification can usually be carried out in two ways. On the basis of the balance, and profit plan handed in, the same indicators shall be used as I already

presented in the section dealing with debtor qualification, but in this case, the bank works on the 27 http://www.doksihu basis of the plan for the future and not for the past. Beyond this, the credit applicant also has to present, what he or she needs the money for, what he or she plans to do with it. In the case of short-term transactions, such writings are usually short, and they rather put the emphasis on presenting the documentations reinforcing the safeness of the transaction. In the case of developments and investments, which require long-term credits, the basis of the decision is the business plan and the feasibility study introducing the project. The bank analyses the business plan, subjects the data to control, and forms an opinion concerning the data handed in. If the concept is creditworthy and there were no other problems during the debtor classification, either; the third phase follows: the coverage appraisal. 2.3 Coverage appraisal The coverage provides solution

in the case, when despite the most careful assessment, the most detailed analysis and the fact that the most talented enterprise is concerned, the plan, to which the credit was tended does not succeed, and there are no other repayment sources left, with the only exception of the coverage, which was required by the bank exactly for this case. The coverage is meant to decrease the risk of outsourcing a loan in the case of the debtor’s non-payment. When dictating the term of collateral, the bank is not motivated by its acquisition, since it expects the repayment of the outstanding credit and additives from the cash-flow of the enterprise. Obtaining the coverage is only the last tool, but banks count on the fact, that the debtor does not want to loose it, therefore he or she does everything to settle his or her debt, more gently worded: its willingness to pay will be stronger. Relying on collateral can also be a strategy for banks, but those being conservative in a good sense rather

avoid such cases, because the money instrument or high-value real estate offered by a customer possessing disadvantageous debtor classification refers to the fact, that the customer has not always kept the prescriptions of tax authorities. When accepting the coverage, the following main aspects are considered by banks: it shall be: 28 http://www.doksihu − estimated by value (its market value shall reasonably be determined) − negotiable (since what is the value worth if it is not marketable) − insured (to eliminate the risk of damage and destruction) and − unencumbered (relatively, fit to the measure of the credit insured). Depending on the type of debtor, its classification, the type and risk of transaction, banks decide the measure and the amount of coverage required. Coverage can be categorised as follows: − material coverage (right of pledge, warehouse warrant, performance bond), − personal coverage (suretyship, bank guarantee, state guarantee, guarantees of

foundations), − other coverage (assignment, options, credit insurance). The money instruments, bank deposits, shares are the types of coverage, which are the easiest to be realised. The question might immediately occur, why the customer, possessing so much trivially liquid means turns to banks at all. There can be several reasons for this. If his/her money instruments are tied up in long-term deposits yielding advantageous interests, it is more worth to take a cheaper credit, than to denounce the deposit. Actually, it is not a frequently occurring coverage, since the interests of credits usually exceed those of deposits. However, if only a short-term, bridging credit is concerned, it is inevitably more worth to choose that, than the denouncement of a larger deposit. If furthermore the deposit is in foreign currency, there is a need to consider the exchange rate risk and the conversion costs, as well. From a technical point of view, the payment of the credit is ensured by the

coverage in the following way: the bank freezes or has frozen the offered deposit account, after the client and the bank keeping the deposit allowed it. Since shares are diverse and different, the bank does not essentially rate the share itself, but the institution or enterprise issuing it. In the case of warehouse warrant and coverage embodying ware-related rights, banks proceed more carefully. Securities ensuring share rights and corporate bonds possess different judgement, too. 29 http://www.doksihu The cash deposit, foreign exchange deposit, securities issued by the central bank or by the state, or guaranteed securities can in practice be described as risk-free ones, therefore they are the most favoured types of securities. Like securities, custom can only be rated individually, as well; but while in the case of securities there is a need to classify one or maximum a few issuers, the custom means the classification of much more companies, which in addition are often totally

unknown. It cannot be stated unambiguously whether it is good or bad that the total custom consists of a few or a lot of customers. This also „depends on” It is good, if there are a few customers but they are known and liquid, and it is also good, if the realisation process of an enterprise „is built on more grounds”. It is not good, if the famous and liquid customer, using its monopoly position, does not pays in time, but it is not acceptable either, if the only thing the customers have in common is poverty. Stock does not count as good coverage, furthermore the individual rating cannot be avoided in this case, either. Advantageous is when the stock can be used in several ways, and when the product belongs to the consumer goods. It cannot be perishable, used, out of date, or such a special raw material, which can hardly be found a customer for. The various machines, instruments, vehicles are not really good coverage. Machines are hard to be mobilised and can only be sold on

a limited market, while the value of vehicles decreases exponentially during the duration of the credit, thus possessing a fairly low level of coverage value. The real estate is a kind of coverage beloved by banks, especially in the case of long-term credits, but also for short-term ones. Their advantage is that their physical existence can easily be verified, as well as their legal ownership, and in addition to this, their value can also be determined with good approximation. Their disadvantage is the lengthiness and inconvenience of acquisition. The governmental, and bank guarantees, and suretyship are considered to be the best forms of coverage. The obligations undertaken by the state are in practice free of risk, and the obligations of banks are generally also beloved, but practically not too frequently occurring 30 http://www.doksihu possibilities of coverage. The transactions protected by the guarantee-institutions (Hitelgarancia Rt., MEHIB) founded by the state can be

considered as risk-free ones, as well. Banks categorize coverage according to their suitability, which categories can be different by different banks. As a result of the complex coverage classification, the measure of the coverage needed for the given transaction will be defined, which is between 110-180%. In the case of a margin with a higher value, banks might find the transaction so risky that they do not undertake that. The physical existence of coverage, the legal accessibility, the variation of the net and real value, and the existence of documents ensuring legal title are quarterly supervised by the bank. 2.4 The qualification of GRANACO Ltd. 5 As mentioned above, the aspects of debtor classification might vary bank by bank. The basic financial indicators (for instance liquidity indicator, debt service indicator) are included in the debtor classification of all the banks; however, apart from the above it is essentially up to the bank, which indicators to take into

consideration. In the case of qualitative aspects this deviation might be even more significant. A part of the commercial banks lays the emphasis on the enterprise’s or the management’s abilities, other ones on the contacts of the enterprise, or on the characteristics of the sector. The aspects of debtor classification, the possible scores and the weighting of scores are confidential. However, after having asked some commercial banks, I formed my own judgement on the most important aspects and the approximate proportion of financial and qualitative aspects. According to this, the qualification of GRANACO Ltd was something like this in 2003. Szőkéné Buzáth, Márta: Bank transactions I. – Credit transactions (Bankügyletek I – Hitelügyletek), TriMester, Tatabánya, 1999 5 31 http://www.doksihu a) Financial indicators The evaluation of the financial indicators in the case of GRANACO Ltd. Table 4. Denomination of the indicator Value of Value Max. score indicator in

the Score of client case of client 1. Capital intensity Capital intensity indicator x≥70 8 70>x≥40 6 40>x≥20 4 x<20 0 x≥1 8 1>x≥0,8 6 0,8>x≥0,7 4 x<0,7 0 x≥8 4 8>x≥5 3 5>x≥2 2 x<2 0 x≥1,8 6 1,8>x≥1,5 4 1,5>x≥1,3 2 x<1,3 0 x≥12 6 12>x≥7 4 7>x≥3 2 x<3 0 23,29 4 0,94 6 2,68 2 2,9 6 19,04 6 2. Liquidity Acid test ratio 3. Profitability Profitability Debt service Level of coverage for the outstanding total debt 4. Cash-flow 32 http://www.doksihu x≥12 6 12>x≥8 4 8>x≥5 2 x<5 0 x≥25 6 Measure of change 25>x≥20 4 of sales revenue 20>x≥15 3 x<15 0 x≥10 4 10>x≥6 3 6>x≥3 2 x<3 0 x≥80 4 Account turnover 80>x≥50 3 indicator 50>x≥20 2 x<20 0 x≥600 8 Net sales revenue 600>x≥400 6 (million HUF) 400>x≥50 4 x<50 0 Cash-flow rate 2,45 0 60,1 6

12,21 4 97,69 4 847,65 8 5. Development of sales revenue Income from operations in proportion to assets 6. Bank account turnover Total score Max. 60 points 46 points The way of calculating the indicators: − Capital intensity ratio = shareholders’ equity / total liabilities, % − Acid test ratio = (total current assets – overdue claims - inventories) / short-term liabilities − Profitability = profit before taxes / net sales, % 33 http://www.doksihu − Debt service = (profit after taxes + annual amortization) / long-term liabilities’ instalment due in the year under review − Level of coverage for the outstanding total debt = shareholders’ equity / long-term liabilities − Cash flow rate = (profit after taxes + annual amortization) / net sales profit, % − Change of the sales revenue = net sales revenue in the period under review/ net sales revenue of reference period, % − Income from operations in proportion to assets = income from operations / average

total assets − Account turnover indicator = annual turnover of the debit account at the bank / annual net sales revenue, % On the basis of the credit assessment datasheet, its attachments and the financial indicators above, the following conclusions can be drawn: − The substantial status of the enterprise The balance sheet total has increased by 55.926000 Ft, which means an increase of 47% In the background of the balance sheet total there was the significant increase of assets, which included the considerable increase of tangible assets, inventories, accounts receivable and prepaid expenses. The accumulation of inventories was caused by the late deliveries of customers. The reason of the increase in the accounts receivable was that the enterprise could manage to agree upon only a longer expiry date for payment with the customers. The slight decrease of liquid assets resulted from the increase of liabilities Current assets have increased to the same extent as the balance sheet

total. As far as liabilities are concerned: the accumulated profit reserve, the profit and the shortterm liabilities increased, while accrued expenses decreased. Within the shareholders’ equity, the values of accumulated profit reserve and total profit are high. − The financial status of the enterprise The suppliers’ invoices were in most of the cases discharged by the company until the requested deadline. However, in some cases there were overdue payments owing to temporary liquidity problems, therefore the suppliers claimed for default interest, with 34 http://www.doksihu which they dispensed in most of the cases. The customers’ debts have been settled The liquidity ratio approached the value one, which is the sign of tensionless liquidity. The enterprise satisfied its tax liabilities, social insurance, and other payment obligations in time. It does not possess shares and bonds bought for selling, and repurchased business shares. The money instruments required for the

operation arose on the field of ordinary business activity, the result of the financial transactions can be ascribed to differences in exchange rate. − The profitability of the enterprise The proportion of the profit before taxes to the net sales has decreased from 3,4% to 2,68%, that is 2,68% of the sales remained at the enterprise after the deduction of expenses and expenditures, which means a low level of profitability. The proportion of the income from operations to the net sales has decreased from 3,67% to 2,52%. The enterprise has accomplished a less profitable accounting year in comparison to the previous one. b) Qualitative aspects Judging the qualitative aspects was quite a hard job for me. In order to classify the conditions of the sector and the market, banks usually ask for some support from experts, whereas I tried to gather information using the sources available for the company (special journals, Internet). Therefore, when assessing the qualitative aspects, I relied

on my own impressions. The evaluation of the qualitative aspects in the case of GRANACO Ltd. Table 5. Description of qualitative Max. score Recommended score Ownership 0-5 5 Market situation 0-15 10 0-15 9 aspect Sectoral classification, relations 35 http://www.doksihu Bank relations Total score 0-5 5 Max. 40 scores 29 scores − Ownership The company was founded in 2000. It is a private enterprise registered and operating in Hungary. The management is performed by the two owners possessing 50-50% The owners fully consider the interests of the company, which is also confirmed by the fact that the enterprise has continuously developed during the three years of its operation. Its turnover has increased year by year, the portfolio of activities has expanded. It has been profitable in every year since its foundation; its profit has been continuously increasing. − Market situation The enterprise deals with the wholesale trade of fodder ingredients and sunflower-seeds

oil, and has to face a thorough competition. The company has a significant number of competitors on the fodder ingredients market. However, their willing for cooperation can be considered as good, competitors mutually purchase and sell goods from and to each other. Compared to its size, the enterprise obtained a significant (approximately 25%) share of the market, which is owing to the accuracy of the deliveries and the reliable quality of the goods distributed. The enterprise laid a considerable emphasis on keeping good business contacts with suppliers and customers. The customers pay within 30-60 days after fulfilment, and the majority of them meets the payment obligations in time. However, the suppliers imposed shorter deadlines upon the enterprise; therefore, it happens that the company fulfils its obligations with delay. The enterprise operates with a minimal amount of stock, and has no frozen stock. On the Hungarian edible oil market, Bunge Plc. is considered as quasi

monopolist, with products having the well-known brand names of “Vénusz” and ”Floriol”. By providing advantageous prices, GRANACO Ltd. attempts to gain an increasingly larger share of this 36 http://www.doksihu market, but is also aware of the fact that this price competition cannot be kept for a long time. Therefore the enterprise began to carry out an intensive marketing activity. They designed an innovative bottle and cap and a more attractive label, and it plans to make advertisements, as well. In this way, besides the advantageous price, the quality of the product will get larger emphasis, too. The enterprise sells edible oil to hypermarkets, which conclude annual contracts with the suppliers. They usually fulfil their payment obligations accurately, since they are more capital intensive than the small-, and middle-sized enterprises, and besides this, their revenue appears right at the time of realisation, in cash. At the same time, exploiting their more advantageous

market position, the hypermarkets pay also within 30-60 days. The due date imposed by suppliers is also shorter in the case of edible oil, they usually ask for advance payment. The enterprise does not possess any stocks of edible oil. − Sectoral classification, relations With the fodder ingredients, the company serves primarily the domestic pork, and poultry breeding. The measure of livestock however, shows a yearly changing picture, and on aggregate, it decreases. The demand for fodder develops corresponding to this Trading with sunflower-seeds oil can be considered as a more successful sector. The reason of this is that the edible oil is a basic product of the food processing industry, it is present in all households, and is used day by day. Although in the previous years, besides olive oil that was distributed earlier, as well; the product range expanded with further types of oil, in Hungary the edible oil made of sunflower-seeds is still the most popular one, owing to its taste

and low price. The cyclical operation is not typical to the sector; the most characteristic influential factor is the annual quantity of harvest. − Banking relations The current accounts of the company were kept by Raiffeisen Bank earlier, too; therefore the bank possessed direct information on the enterprise’s solvency and willingness to cooperate. 37 http://www.doksihu The company did not have late payments and alignments against the bank. The company was not in contact with other credit institutions. The rating of financial indicators and qualitative aspects can be carried out in several ways. I employed the so-called objective risk-scoring method, the essence of which is that the scores gained during the classification are summarized. Thereafter, the bank divides the total score into categories, into one of which each debtor can be classified. The basic category obtained this way can be modified later on, when the client does not meet the rules and regulations prescribed

by the bank. Because of simplicity I will use four categories here, as follows: Debtor rating categories applied by banks Table 6. Debtor rating I Interpretation Required total score Debtor rating II Debtor rating III Debtor rating IV Excellent credit Good credit Limited credit rating rating rating 80-100 65-79 50-64 Below 50 100-140% 140-160% Above 160% - Not creditworthy Measure of the coverage required ( %) Source: Szőkéné Buzáth, Márta: Bank transactions I. – Credit transactions, p62 The total score reached by the enterprise is 77, therefore it falls into category II, so it can be considered as having a good creditworthiness. According to the chart above, the enterprise should have offered a collateral covering 140160% of the credit applied for. However, the construction offered by the bank and finally employed by the company made other conditions. Later on, I will return to this in deeper details. 38 http://www.doksihu Following the debtor

classification and the coverage appraisal, the bank administrator presents the credit application to the censorship committees, which decide if the credit application will be accepted or rejected. In the case of a positive decision, the next step is the conclusion of the general credit contract. 3. The credit construction employed by GRANACO Ltd 6 According to the classification of the bank, the enterprise proved to be creditworthy. Considering the demands of the enterprise and the result of its classification, the bank chose the construction which was the most adequate for both of the parties: it was the so called TCF (Trade and Commodity Finance). TCF is a short-term revolving credit, which is possible to be employed in Forint and in foreign currencies, as well; and which was developed for enterprises distributing well-realisable products, possessing a stable and liquid range of customers, but despite all of these, struggling with finance problems. Since the construction offered an

acceptable solution for the problem of the enterprise, and the committees agreed to pay the credit, the two parties concluded the general credit contract. In what follows, I would like to present this contract, putting the emphasis on the system of conditions of the construction, on the way of its employment, and on the advantages and disadvantages it means to the enterprise. The contract consists of more parts, the most important are: the way of employment, the obligations of the enterprise, cases of breach of contract and possibilities for legal remedy. 3.1 Way of employment a) Use of the credit The first rule of the contract is that the credit can exclusively be employed for financing the value of goods, being already on the way to GRANACO Ltd. 6 Credit contract between GRANACO Ltd. and Raiffeisen Bank Plc 39 http://www.doksihu b) Way of employment The enterprise can employ the credit by filling in a call-in notification (containing the day of the call-in and the amount

of credit), and handing it in to the bank. The call-in notification must be received by the bank until 10 a.m, two banking-days before the actual day of call-in. Fortunately, in practice, the bank handles it in a more flexible way: the notification is allowed to be handed in until 12 a.m on the day of call-in A precondition of calling in the credit is that the enterprise has to hand in to the bank a number of specified documents, at latest together with the notification. These documents are: − a copy of the consignment note certifying the railway/river transport of the goods, − a copy of the invoice issued by the supplier, − a copy of the following documents applying to the goods: certificate of origin, certificate of quality, certificate of weight, phytosanitary and/or veterinary certificates, − a charge for transfer in favour of the supplier, − contracts concluded with the buyer, referring to the goods to be purchased. In cases when the enterprise already delivered the

goods concerned to a domestic customer, and this can be certified by a signed commercial invoice, on which the customer undertakes absolute payment liability, the only precondition of the calling in is sending the copy of the invoice issued by the seller and the charge of transfer. If the documents handed in are adequate according to the bank’s judgement, the amount of the credit paid out will be transferred further to the seller of the good. The bank accepts invoices related to the individual customers within a limit defined in advance; an additional condition is that the amount of the credit called in must not exceed the amount of the invoice issued by the seller. An advantage of the TCF construction is that the enterprise is also entitled to call in a bank guarantee, whenever the supplier requires so. In this case, the bank diverts the credit to pay out the amount specified in the statement of claim handed in by the beneficiary of the bank guarantee. If it is not called in during

the given period, the amount separated for the given 40 http://www.doksihu bank guarantee will be available for calling in credits or for issuing another bank guarantee. An additional advantage of the construction is that the bank provides the credit in HUF, Euro or USD, as the enterprise requires. Since the enterprise deals with foreign trade and frequently contracts in the foreign exchanges above, this is an advantageous feature for the company. c) Collateral As coverage, the enterprise offered the following. − Inclusion The enterprise authorised the bank to debit any of its accounts managed by the bank with the amount of obligation if the enterprise did not pay till due date. The bank can enforce this right regarding the fixed money instruments and deposits of the company, as well. − Caution money The enterprise placed a deposit of 23.320000 Ft at the bank as a coverage for its payment obligations. This deposit is not possible to be disposed of neither by the enterprise,

nor by the liquidator in the case of bankruptcy, until the payment obligations of the enterprise have ceased. According to the deposit agreement between the bank and the enterprise, the bank pays a certain amount of interest on this amount. As long as the deposited amount forms a coverage of the contract, the enterprise is not allowed to have disposal of the interests yielded, either. In the case of late or failed payment, the bank can fulfil its claim by deducting the amount of the enterprise’s debt from the caution money. − Mortgage By signing the general credit contract, the enterprise undertakes the concluding of a contract of pledge with the bank, debiting properties, laws and claims. At the moment, the enterprise does not possess properties or real estates which were suitable to conclude a contract of pledge on, consequently the bank is only able to enforce its right for the mortgage regarding the claims and the shareholders’ equity of the enterprise. 41

http://www.doksihu As far as the collateral is concerned, the construction is advantageous under any circumstances, since the enterprise does not need to produce collateral covering the transaction in 110-180%; besides the amount deposited, the coverage is provided primarily by the outgoing invoices. d) Fluctuations of exchange rate It might also occur that owing to the fluctuations of the exchange rate, the collective dollarvalue of the credits called in and not paid back yet and the amount separated to call in the bank-guarantee exceeds the 105% of the total employable amount. For these cases, the bank offers the following solutions: − on request of the enterprise the bank might increase the extent of the total employable amount, or − the enterprise has to perform advance payment. (The exchange rate used by the bank is the central rate of the foreign currency valid two banking days before calculation.) This is disadvantageous for the enterprise because of the fact that it has

no direct influence on the development of exchange rates; this way there might be a need to pay back significant amounts due to reasons independent of the enterprise. Actually, this could happen if the company called in the total amount of the credit. However, during the two years of its employment, it has never happened. e) Paying interest After the daily outstanding amount of the credit, the enterprise has to pay interest, entirely until the complete reimbursement of the credit. The bank always determines the interest rate two banking days before the given interest period. Its value, depending on the currency applied, is around BUBOR/LIBOR/EURIBOR for one month + 1-1,5%. Depending on the direction and the measure of variation of the interest rate applying to the following interest period, it might mean advantage or disadvantage for the enterprise. The interest is always to be paid retroactively. In the case of default payment, the enterprise shall pay an interest of 6% for delay, in

addition to the amounts and interests due. f) Credit fee 42 http://www.doksihu The credit fee is another expense related to the credit. The enterprise had to pay 150000 Ft credit fee after each 1000 tons of goods purchased from the credit called in. During 2004, the credit fee was modified to 0,25% of the actual amount of credit called in. g) Repaying the credit The credits called in and not yet paid back will be settled from the values paid by domestic customers, within maximum 60 days after the call-in. The value of goods will be credited on the (so-called) special clearing account, which the enterprise needs to maintain in the bank just for this purpose. The bank might assert its claim for the sum itself against the balance of the special clearing account, and that for the various charges and interests, against any of the accounts of the company. The bank settles the sum of the outstanding credits in the way of diverting the purchase price paid by the customers to settle the

credits specified in the notification. The remaining amount of the purchase price (paid by the costumers), which came in to the special clearing account, and not diverted to pay back the given credit, can only be utilised by the enterprise, if the given credit is entirely paid back and the enterprise does not possess any existing repayment obligations. If the balance of the above mentioned account becomes partly or entirely utilisable, the bank will carry over the free utilisable amount onto another account of the enterprise. The enterprise is obliged to pay back the entire amount of credit until the day of termination of the contract. h) Suspending the availability The bank can unilaterally suspend and/or countermand the availability for an undetermined period anytime, if it thinks that the credit would endanger or encumber its liquidity. 3.2 The obligations of the enterprise In the case of providing a credit, banks always attempt to minimise their risks; therefore, besides

requiring collateral covering the transaction in 110-180%, they impose further obligations upon the enterprises. This is an important factor from the point of view of the enterprise, since in addition to the interest to be paid, the credit fee and other obligations, they also need to consider, to what extent they will be able or willing to fulfil other 43 http://www.doksihu obligations. The contract imposes several obligations upon the enterprise, out of which the most important ones are the followings. A precondition of employing the credit is that before the first call-in, the enterprise has to hand in to the bank the following documents: − a copy of the deed of association, − a valid copy of the commercial register, − a certificate containing the followings: name, address and signature of the persons entitled to sign contracts; furthermore names of the persons entitled to sign the notifications sent within the frame of the contracts, − a copy of the decision taken by

the correspondent organ of the enterprise entitling the enterprise to conclude the contract and to fulfil the obligations arising from that, − samples of signatures of the representatives, − the opening form of the enterprise’s special clearing account, − a certificate about the availability of the required coverage. Besides these, in the case of calling in a certain credit, the following two conditions have to be fulfilled as well: − on the given day of calling in, there was no breach of contract, and no violation is in progress, and − the enterprise fulfilled its contractual obligations, and its contractual declarations are real and complete on the given day. Besides the preconditions mentioned above, the bank might impose restrictions and obligations related to the operation of the enterprise, as well; for instance concerning the profit distribution, the credit according or the realisation of the company’s properties. Without the bank’s approval, the enterprise is

not entitled to conclude contracts, as a result of which the enterprise would share its income with a third party, or the management of its business activity would be taken over by a third person. 44 http://www.doksihu Without the bank’s permission the enterprise is not allowed to grant credits with amounts larger than 50.000000 Ft, is not allowed to leave deposits exceeding this amount and to invest amounts larger than the above mentioned one. The exceptions are: − deposits in financial institutions with well-balanced financial background, or the deferred payment provided to the customers during the regular business activity, − investment in short-term securities which can be considered as sure, for the purpose of short-term liquidity-handling, − credit given to the employees, which does not exceed the ordinary measure. Without the bank’s approval, the enterprise is not entitled to burden its rights, assets, incomes, personal properties or real estates with any kinds of

transaction coverage; except those stated by the provision of law, provided that the company removes them within a year. The enterprise is not entitled to sell or assign its properties or to assign the right of disposal or the right of usage above its properties if it might have disadvantageous influence on the fulfilment of the enterprise’s obligations set in the contract. The enterprise is not entitled to assign or transfer its rights and obligations arising from the contract. On the other hand, the bank is able to assign or transfer its rights to other credit institutions either partly, or totally. The enterprise has various duties of disclosure arising, as well; for example it is obliged to report the changes in ownership, any kinds of change concerning the personal composition of the management, over 30 day overdue payment obligations against any third person, or if the enterprise wants to open an account in another financial institution. Furthermore, the enterprise has to

inform the bank about all breaches of the contract, or all events which have or might have disadvantageous effect on the fulfilment of its obligations. 45 http://www.doksihu The enterprise is obliged to hand in its annual report and its auditors report according to the Hungarian-, and the international regulations to the bank within 10 calendar days after its completion, but not later than the 10th of June in the year following the year under review. Besides these, the quarterly information datasheet also has to be sent to the bank within 30 days after the relevant quarter. During the period the contract is in force, or as long as there are existing obligations of the enterprise against the bank, the enterprise has to arrange its entire cash-flow on its accounts kept by the bank. Besides, the enterprise is obliged to maintain a special clearing account, from which payment can only be performed after the available monetary assets of the company were transferred to it. The

enterprise has to send the bank a weekly report on pre-financed stocks and on the stock of claims charged with the mortgage of the bank, which has to be at least 130% of the amount of the credit. If the enterprise sends a notification related to goods not delivered yet, then it is obliged to conclude insurance for the goods, and the bank must be specified as the beneficiary of the insurance. In addition to this, it might occur that the enterprise has to cover further expenses, as well, for example the enterprise has to reinstate the bank’s damage and expense, if they arise in relation to the followings: − breach of contract, − execution or asserting the rights of the bank specified in the contract, − any kinds of investigation or procedure related to the credits, if the enterprise’s breach of contract proves true. Moreover, if owing to any kind of provision of the law, ordinance, regulation or change in their interpretation; additional costs arise for the bank, related to

giving or maintaining the credit, the bank can pass it on the enterprise. 3.3 Cases of breach of contract The following cases are described as breach of contract: 46 http://www.doksihu − the enterprise does not pay the amount to be paid according to the contract when due, or − does not fulfil its obligations specified in the contract, − any of its former statements proves to be untrue, incomplete or misleading, − winding-up proceedings will be taken against it, or bankruptcy proceedings or final accounting will be initiated, − an event occurs, on the basis of which the bank might get to the conclusion that a disadvantageous change will take place in the business, or financial situation of the enterprise, − a circumstance emerges, which might endanger the enterprise’s ability to fulfil its contractual obligations, or − the enterprise violates any of its contracts concluded with any financial institutions. 3.4 Possibilities for legal remedy If the contract is

breached, then (in addition to the other possibilities for legal remedy) the bank is entitled to do the following: − cancel its obligation of granting credit with immediate effect, − pronounce the credits, all of their interests, and all other amounts, which are to be paid by the enterprise immediately due and payable, and − enforce the collateral. The bank and the enterprise attempt to settle the controversial cases in the way of mutual consent. In the case of failure, they turn to the three-member council of the Constant Arbitration Court of the Money and Capital Market. 3.5 Advantages and disadvantages of the construction Before presenting the concrete advantages and disadvantages, I would like to summarise the facts above. So the supplier delivers the goods, afterwards sends the invoice to the enterprise. The enterprise sells the goods, then issues an invoice with two copies to the buyer, on which it requires the counter value to be transferred to its special clearing

account. The followings will be listed on the invoice, as well: “Charged by the mortgage of Raiffeisen Bank”, and “I undertake absolute payment obligation for the invoice”. The customer acknowledges the acceptance of these conditions with his/her signature, then 47 http://www.doksihu sends back a copy to the enterprise. Thereafter the enterprise faxes the call-in notification filled in adequately to the bank, attaching the invoice of the supplier and that of the customer. The bank credits the sum specified on the supplier’s invoice to the account of the supplier. Thereafter the bank withdraws the charges and interests from the enterprise’s account, and the main sum – after the payment of the customer – from its special clearing account. The advantage of the construction is that it is a revolving one, which means that after repaying a given credit, the amount paid becomes available again. Furthermore, it is available in several currencies, which is required by an

enterprise dealing with foreign trade. It is also advantageous as far as coverage is concerned, since – unlike in the case of an overdraft credit - the offered coverage does not need to cover 110-180% of the total credit amount. The enterprise deposited 23.320000 Ft at the bank, but it does not cover the full credit amount (425.000 dollar; in the year 2005 1000000 dollar) at all Further coverage was provided by the outgoing invoices. In this way, the bank undertakes a risk, which it attempts to minimise by qualifying these enterprises, as well; before concluding the general credit contract. The bank also attempts to share the risk by determining a limit for more enterprises. I would like to mention one more thing concerning coverage. Due to the fact that the enterprise did not possess suitable real estates or properties, having no other choices, it offered some caution money. However, it has the disadvantage that the enterprise cannot dispose over this amount. The bank pays a

certain amount of interest for it, but on the one hand it is less than the enterprise would get in a normal case, on the other hand, the paid interest will not be available. Therefore, while for example a machine is continuously producing value for a given company, this amount does not take a direct part in the growth of the enterprise. The counter value of the goods arrives on the special clearing account, from which the bank withdraws the relevant sum. This is all right, but the sales profit will be put on this account, as well; since the enterprise practically finances the purchases from its realised sales, and the value of sales arrives on the special clearing account. However, the amount 48 http://www.doksihu remaining after the deduction of the main sum will only be available, if the enterprise satisfies all of its contractual obligations. Due to the above, the enterprise cannot invest this amount, or use it for other purposes. Naturally, the use of credit carries plus

administration for both sides, but it soon will be clear that the enterprise benefits from the credit in any case. The problem of the enterprise basically arises from the difference in the payment terms of suppliers and customers. The payment terms of suppliers are usually a few days after fulfilment, whereas the customers pay within 30-60 days. I would like to represent through an example, how the construction solves this problem. There is a Romanian supplier to whom the counter value is to be paid within three days after fulfilment. The supplier contracted with the enterprise with DAF parity, which means that the supplier performs at the Hungarian-Romanian border. Accordingly, the supplier sends the wagons, and when they reach the agreed frontier station, the contract can be considered as fulfilled by the supplier. After crossing the border, the wagons will be forwarded to the railway station specified by the recipient, within one day at the latest. On the railway station the goods

will be put on trucks, and will be delivered either by the buyer, or by a carrier designated by the enterprise. After checking the weight of goods, the enterprise issues the invoice, and sends it to the buyer, who will fax it back signed. When wagons are forwarded to the railway station on the day of crossing the border, the call-in can be solved within one day; if they are forwarded one day after crossing the border, it can be done within two days. It might also occur that the enterprise, - making use of an advantageous offer -, concludes a contract with the supplier, and the goods will be sent with no buyer for it. If the required amount is available on any of the bank accounts of the enterprise, there will not be any problems. The enterprise pays for the goods, then puts them into a warehouse and later sells it. It also occurs that the enterprise finances a certain purchase not from its sales, but by an amount coming from another selling transaction. In such cases, the amount

coming in from the previous sales is available for financing another purchase. Irrespective of this, the enterprise attempts to find a buyer for the goods arrived as soon as possible, of course. 49 http://www.doksihu The problem of advance payments could only be solved by the construction, if the company used warehouse warrants, but the enterprise does not want to adopt it. However, since the majority of purchases can be financed from the related sales, the enterprise is able to settle its advance payments from its equity. As a summary, we can state, that although the construction includes some disadvantages for the enterprise, it is an effective solution for its financing problems. 4. Credit monitoring The last step in the crediting process is monitoring. Credit monitoring means the continuous follow-up and appraisal of the amounts outsourced by the bank and the customers, to ensure the safety and payment of the outstanding claim. The monitoring begins with verifying the use of

credit, since the detailed assessment of the purpose and the economic profitability of the credit would have been unnecessary if the customer finally spent the money on totally other purposes. Once the credit is paid out, monitoring will include the investigation of the debtor’s situation and the verification whether the purpose of the credit operates according to the plan. This is a quite difficult situation, since the customer might seriously endanger the refund of the credit, even when the conditions specified in the contract are kept – but by performing other activities that exposes the enterprise, and the outstanding credit to danger. For that reason, banks reclassify the enterprises each year, as a result of which the enterprise concerned might be put into another debtor classification category. Upgrading is reasoned for example by a positive interim tendency, market penetration, or by significant interim increase of capital. Reasons for relegation can include rescheduled

public debts, significant interim negative change concerning the situation of the company, provided / received credit with large measures in comparison to the balance of the company, buy-back of own business share, and so on. Relegation is also possible in certain exceptional cases, such as in the case of rescheduled public debts, minimal acceptable measure of keyindicators, or any significant negative interim change. 50 http://www.doksihu A more specified result of the monitoring comes from the periodical rating of the coverage. The accurately drafted credit contracts normally contain a passage, which obliges the debtor to maintain the real value of the coverage, and should this level decrease, new coverage is to be involved. The current regulation prescribes credit control quarterly; however, monitoring must be continuous and specific for each client. The bank obliged the enterprise to hand in quarterly datasheets, with similar content to that of the credit assessment datasheet.

V. ALTERNATIVE SOLUTIONS TO FINANCE GRANACO LTD In the following section I would like to present some alternative financing methods, since this construction might work well with the enterprise, but despite, it is not sure at all, that this is the best solution for the problems arisen. 1. Factoring 7 a) Introduction Factoring is actually lending money in return for buying accounts receivable. It is a financial transaction with a significant past, which changes somewhat from time to time in accordance with the development of business life, and appears over and over again in a modern form, after being adjusted to the demands of business life participants. It was “rediscovered” in the 1950’s in the United States; thereafter, it spread over Europe, as well. After the transition, factoring companies appeared in Middle-Eastern-Europe, as well; but the considerable development of the service started only in the late 90’s. The total factored turnover nearly quadrupled between 1999

and 2001. In 2002, in the circle of the associated companies of the Hungarian Factoring Association, the turnover reached 231 billion HUF, and in 2003 it increased up to 282 billion HUF in the same circle. Despite its dynamic expansion, the young business is still in its infancies. The MiddleEastern-European ex-communist countries had 1% share in the world’s factoring turnover in the year 2001. 7 Gellért, Andor: Bank transactions (Banküzletek), Közgazdasági és Jogi Könyvkiadó, Budapest, 1993 51 http://www.doksihu The perspective prospects are advantageous, and like in the countries and regions of advanced financial life, one can expect that the sector of factoring, as an integral part of business life, will expand and gain strength in Middle-Eastern-Europe and Hungary, too. However, the current experience is that this financial service is not known by small-, and middle sized enterprises which would be in a real need of using factoring services to solve their liquidity

problems. In this respect, the Lánchíd Factoring Program launched in 2003 by the Ministry of Economy and Transport means an essential governmental help, ensuring the small-, and micro-sized employing factor credit with subsidised interests. The programme went on in 2004, which provides a good chance for more and more enterprises to utilise and realise their potential possibilities for increase. b) Types of factoring services There are many kinds of factoring due to its inherent flexibility. The most widespread construction in Hungary is the so called recourse factoring. In this case, the factor purchases the invoices of the client for cash, but the risk attached to the crediting of the buyer’s debt remains at the client. Accordingly, if the buyer does not pay, the factor is entitled to make its client purchase back the invoice. The recourse factoring is especially attractive for clients from the sector of small-, and middle sized companies, which struggle with liquidity problems

and cannot apply for bank credits, but possess customers better than the average. In the case of non-recourse factoring, in addition to the factor, the buyer and the supplier; the credit insurer might also enter into the transaction. In this case, the factor can only require the settlement of the debt from the buyer. If the buyer cannot pay due to bankruptcy or insolvency, the insurer compensates the factor in 80%. This form is interesting for small-, and middle-sized enterprises, which consciously attempt to prevent their equity and to avoid the unnecessary risks. The factor transaction might happen within the same country, this is domestic factoring, but it might be related to export, as well. In this latter case, we call it export factoring 52 http://www.doksihu In export factoring, the exporter concludes a general agreement with a domestic factor. The export factor contacts its partner, the so-called import factor in the target country and cedes the purchased customer debt

further to its foreign partner. The domestic client is in direct contact only with the export factor, and the import factor settles its obligations against the export factor. An essential element of the construction is the risk diversification between the two factors. Regarding other various types of constructions, we should also mention the silent factoring, where the buyer does not know that the supplier has sold the current outstanding debts to the factor, performs the payment to the supplier, who forwards a part of the amount to the factor. c) The process of factoring Factors recommend factoring to small-, and middle sized companies, which: − operate on the field of industry, trade, − grow quickly, but due to the lack of coverage, they cannot get the credit required to their growth, − founded a little while ago, possessing adequate market, but having not yet a past suitable to apply for bank credits, − produce consumer goods, -durables, and/or goods requiring small

investments, trades with them, or provides services, the fulfilment of which is uncontroversial, − the annual turnover, which is planned to be factorised reaches/exceeds 20 million HUF per year, − the client possesses more (possibly multinational) customers, and there are numerous invoices arising, − there are insufficient administrative resources to handle and levy the debt, and − liquidity could be improved by an effective system of demand notes and collection. There are a number of reasons why companies decide to sell their claims. On the one hand, if they do not know the buyer, they are not sure of its capacity to pay (e.g in the case of foreign trade); on the other hand, if they do not possess enough money to bear the financial 53 http://www.doksihu charges (lack of funds) and for any reason they cannot get bank credit. In our country, this latter one is the typical reason for reaching factoring agreements. Unfortunately, in practice everyone pays its partners with

delay, forming circular debts. Within the frame of the factoring, everyone takes the expiry dates for payment seriously, so this way of financing results in a more calculable flow of money. According to the exact definition, the factoring is a continuous agreement between the factor and the supplier, who delivers the goods or services with open accounts, about the following: − the factor purchases the accounts receivable of the supplier with spot payment, − handles the customer debts, thus managing tasks of keeping records, and − collects the accounts receivable. The factoring company (factor) pays a significant part – usually 80% – of the short-term customer claims coming from the purchased domestic-, or export deliveries. Therefore, this form of financing is a well-employable financial service essentially for small-, and middle sized supplier enterprises possessing more limited money instruments, because instead of the conventional 30, incidentally 60 days due date, they

get money immediately. The possibilities for financing current assets of the enterprises employing factoring improve spectacularly, since the process of production or service can be restarted out of the money paid by the factor. As a new owner of the debt, the factor makes sure that the debt is collected. Factoring can be a single – occasional – transaction, but its essence is just the continuity, since it helps to maintain liquidity at an optimal level. This is why the factoring party and the factor conclude contracts with longer durations. The conditions are always adjusted to the conditions of the related company employing the service, taking into consideration the service-, and delivery characteristics. In this way, such long-lasting co-operations might come into existence between the factoring party and the factor, which help the enterprises to exploit and realise their growth potential. 54 http://www.doksihu The question might arise, why does the factor pay in advance

the accounts receivable of an enterprise, which struggles with liquidity problems, and which mostly would – if only – get credit from a bank due to the provision of significant coverage? The answer is quite simple. The essential thing for the factor is principally not the financial reliability of the vendor, but that of the buyer, since the counter-value of the purchased claim shall be received from the buyer. Therefore, the business depends principally on who the buyer is, since the risk of the factor is with the buyer, because he/she is the debtor. As a result, in the business procedure of factoring, the rating of the buyer is of high importance. If the buyer obtains a good rating, the client might receive a significant part of the purchased invoice value in 48 hours, instead of the usual 4-8 weeks of duration. The counter-value of the invoice belongs to the factor, since its client, the buyer assigned it to him/her. Once the buyer paid, the factor and the supplier reckon with

the remained proportion, as well. d) A factoring transaction The aim of the description below is to demonstrate the essence of factoring;, however, in practice, there are many kinds of deviations, of course. The supplier receives an order, but is not able to finance the expenses related to the transaction, such as the procurement of material and employment of subcontractors. Therefore, it searches for a factoring company, which examines the creditworthiness of the contractor, furthermore classifies the transaction between the buyer and the supplier, and makes a declaration, if it deems the factoring transaction concerned to be feasible. If everything is OK, the factoring company concludes the general factoring agreement with the supplier, and in the case of non-silent factoring, they inform the buyer about this. Following the delivery, the buyer confirms the performance to the factoring company keeping records. The factoring company pays about 80% of the invoice value to its client,

which in this way will be able to fulfil the further phases of the contract. The factoring instalment will be paid out of the purchase price received latest on the due date, the supplier receives the retained 20% of the purchase price, as well; and finally they reckon the factoring fee with the factor. 55 http://www.doksihu Meanwhile, deliveries are continuously being done; the factoring company finances the entire general delivery contract according to part performances, that is invoice by invoice. Occasionally, in order to reduce payment risks, an insurance company might also be taken into in the transaction. e) The cost of factoring Usually, and only for the purpose of illustrating the order of magnitude, if for example the duration of factoring is 30 days, the cost of factoring rates around 1,6-2% of the value of the invoice. The cost is composed of two factors, the factor fee and the interest The factor fee is a fixed fee calculated on the basis of the gross amount of the

invoice, and the interest is the interest rate calculated on the basis of the advance payment value in proportion to the duration. Whether this cost is too much or few, shall be decided according to the followings: − The factor provides a complex service. If a conventional, complete construction is applied, the factor buys the accounts receivable; handles the debts of customers, so it also keeps records; collects the accounts receivable and undertakes the risks of the business. The buyer practically shifts these tasks to the factor, which carries out the above-mentioned activities taking into account the peculiarities of the customer. The enterprise not only receives money, but the burden of numerous administrative tasks, moreover that of collecting the outstanding debts will be taken off his/her shoulder. − On the other hand, the situation of the company is essential. Does it have any other chance to resolve the cash-flow problems in the given period, is it able to employ an

overdraft credit, and if yes, how much the interest rate is, or does it require continuous financing, which is the essence of factoring? f) The advantages of factoring − the supplier will be able obtain more advantageous market possibilities, due to the more advantageous realisation for the buyer, which means open account and deferred payment, 56 http://www.doksihu − the bank, - according to the prescriptions of the factoring contract between the bank and the supplier -, undertakes the registration and collection of the commercial invoices of the supplier, and it finances 80% of the gross amount of the invoices with advantageous interest conditions, then after the fulfilment of the customer, the bank credits the account of the supplier with the difference of the amount paid by the buyer and the advance payment of the purchase price, − the bank takes over the arrangement of collecting the invoices with deferred payment, thus discharging the supplier of performing the relating

administrative tasks and of their costs, − by assigning the collection of claims, there are more possibilities to solve other problems related to realisation, − it should not be left out of consideration, either that in the case of factoring – unlike in the case of traditional methods – there is no need to provide a discount to the customer, no extra credit insurance is needed, and liquidity improves. Companies, which decided to apply the construction believe that the price of the service, – taking into consideration its advantages –, is reasonable. They emphasise that due to factoring, the amount of their outstanding debts decreased, the velocity of circulation of assets increased, and income becomes predictable. The cash-flow speeded up in this way results in the improvement of the company’s liquidity, as well. The amount of the claim advanced can be spent on increasing the turnover of the company or conquering new markets. An important aspect is that the

administration of the factoring is swift and simple; the enterprise might come by money, as early as within a few days. Unlike bank credit, factoring also has the advantage that new enterprises and the ones possessing a not too good balance can apply, as well; due to the fact that there is no need for coverage. g) Factoring as a financial solution for GRANACO Ltd. Based on the above, I believe that factoring, as a possible method of financing is worth to be considered by GRANACO Ltd. It is able to remedy the enterprise’s problems arising from the different payment terms. 57 http://www.doksihu To employ factoring, the enterprise essentially does not need to fulfil any conditions; it is enough if its clientele is solvent. And the enterprise does fulfil this term A part of its clientele is formed by hypermarkets in Hungary, which are considered as good debtors by even commercial banks. Banks provide credits to them readily The hypermarkets are wellprovided with capital, their

income is realised in cash at the moment of sale In the case of fodder ingredients, the clientele of the enterprise is also formed by solvent customers, which is also verified by the construction employed currently. Before concluding the general credit contract, the bank rated the companies, invoices of which the enterprise wanted to offer as coverage in the event of call-in, and all of them were found solvent. Consequently, the enterprise has the clientele required for the factoring. In the followings, I would like to examine, if the factoring was more advantageous for the enterprise than employing the TCF construction. The transaction begins the same way in both cases. The enterprise, as a supplier, delivers the goods to the buyer, which certifies it by signing the invoice issued by the enterprise. This will be handed in by the company to the bank in the case of TCF, or the factor in the case of factoring (which can be a bank or a company specialised at this business). In the

case of factoring, the factor pays 80% of the invoice total, which the enterprise can spend on whatever it wants to. In the event of TCF, the total amount of the invoice becomes available, but can only be utilised to finance the values of goods. Once the buyer settled its debt, the interest and the credit / factor fee will be withdrawn in both cases. The factor pays the remaining 20% reduced by the expenses to the company. Accordingly, the invoice value reduced by the interest and the fees will be paid in both cases, either after the delivery of goods (in the case of TCF) or after the buyer’s payment (in the case of factoring). As far as costs are concerned, it can be stated that the cost of factoring is higher than that of bank credit, which arises from the fact that the bank - in addition to the payment provides further services, as well; such as registering the invoices, collecting debts; furthermore it requires no coverage. Factors might determine different fees and interests;

58 http://www.doksihu however, it is not sure at all that this is disproportionately high in return to the service offered. From the coverage point of view, the more advantageous way is factoring, which requires no coverage, with the exception of the assignment of the claim. In the case of TCF, the enterprise had to deposit a significant amount of caution money, which could have been utilised for other purposes, as well. There is one more thing I would like to examine: the issue of limits. The bank determined a certain amount of limit for each buyer. The invoice of a given company can be offered as coverage to the extent of this amount. Actually, I am not sure if such limits exist in the case of factoring, but if not, then it would be a real advantage of factoring. I can summarize the facts mentioned above as follows: on one side of the balance, we can find the disengaged caution money, the wider range of services and the freely utilisable value of the invoices, whereas the other

side includes the only 80% advance payment and the higher costs. Anyway, the enterprise should give a thought to the possibility of factoring. 2. Overdraft credit As another possible solution for the financing problem of GRANACO Ltd., I would like to present the overdraft credit. a) Introduction Out of the credit constructions provided by commercial banks, the overdraft credit is the simplest one, and maybe for that reason, the most preferred, too. A number of articles describe it as the most frequently employed kind of credit; however, I also had the opportunity to ascertain its popularity. I visited some banks in order to find the most adequate solution for the enterprise. After presenting the enterprise and its problems nevertheless, each bank offered to employ an overdraft credit. A reason for this could naturally be the insufficient information about the enterprise, but again banks do admit that this is the construction which is applied for in most of the cases. 59

http://www.doksihu b) The essence of overdraft credit and its employment 8 According to the professional definition, the essence of overdraft credit is that the account managing bank of the supplier performs the money orders, which do not have coverage provided by the current deposits of the supplier to the extent of a limit, specified in the overdraft contract. In practice it means that the enterprise can debit its current account to the extent of a certain amount, independently of the really available amount on the account. Later on, buyers transfer the counter-value of the goods or the service to the current account of the enterprise, out of which the credit withdrawn can be paid back. The entire process is actually very simple, the enterprise performs the same activities as before: settles the invoices of its suppliers and follows up the payments of its buyers. The only difference is that it does not have to be anxious that there is not enough money on its account or that it

cannot satisfy the claim of the suppliers, the only thing, which it needs to pay attention to, is not to exceed the limit specified. c) The overdraft credit as a financial solution for GRANACO Ltd. I am really interested in the analysis of overdraft credit as a possibility for financing, because Raiffeisen Bank plans to convert a part of the amount available within the frames of TCF into an overdraft credit. If this plan comes true, the financing of the enterprise will look like as follows. After the fulfilment of its supplier, the company makes its current account debited with the amount of the value of goods. The goods will be resold, which is followed by the payment of the buyers. The amount unavailable at the moment of payment will be paid back through credit entries. The big advantage of the construction is that it can be employed to advance payment, as well. The TCF did not provide opportunity for this (unless the company decides to use warehouse warrants), since the enterprise

can only call-in a credit if it presents the invoices acknowledged by certain buyers as a coverage. If the enterprise already called in a credit for all these invoices, the fulfilment of advance payment out of credit is practically impossible, since the company itself is not yet in possession of the goods. 8 Gellért, Andor: Bank transactions (Banküzletek), Közgazdasági és Jogi Könyvkiadó, Budapest, 1993 60 http://www.doksihu Furthermore, it can be employed not only to finance counter-value of goods; in this way, the enterprise is able to cover all of its expenses, as well. A further significant advantage of this method is that the administration becomes more simply, which is directly followed by faster payments. In the case of TCF, the call-in is antedated by the handing-in of the attachments of the callin notification, which means a significant amount of extra work for both of the parties. On the contrary, overdraft credit only requires an order to make remittance.

There are no limits determined for each partner, only the limit applying to the amount available to be called-in. However, overdraft credit possesses not only advantages, but disadvantages, as well. The overdraft credit is namely paid out in forint, which does not bear an extra risk if the enterprise pays its supplier in dollar and the value of goods comes in forint from the buyer (it bears the same exchange rate risk in the case of TCF, as well). But if both amounts are given in dollar, the following can happen. In the event of paying to the supplier, the bank converts the given dollar value into forint; thereafter, it debits the account of the enterprise with this forint amount. Afterwards, when the buyer pays also in dollar, this amount will be refunded after converting it into forint at another exchange rate. A solution could be for this problem if the bank made the overdraft credit available for the enterprise in more currencies. As it can be seen, employing an overdraft credit

would be accompanied by a lot of advantages for the enterprise. Based on this, there comes the question: why has the enterprise not employed this so far? The answer is simple: because of the coverage prescribed. The condition of paying the overdraft credit is namely to provide collateral covering at least 150% of the credit limit. At the time when the enterprise decided to employ a credit, it did not possess the required coverage, and it was in business only for two years. But now, the company is able to offer coverage with an adequate measure, and it has a four-year relationship with the bank, out of which in the last two years the 61 http://www.doksihu company was successfully employing TCF; in return to which the bank is able to convert a part of TCF into overdraft credit. It is not decided yet if the general credit contract will be modified or not; in my opinion the enterprise would gain by the modification. The amount the bank wants to convert is near the sum the enterprise

called-in on average. So possibly the company would be able to solve most or all of its financing problems, including advance payments, as well; from the overdraft credit. VI. CONCLUSION The first goal of my thesis was to find the reasons of the financing problems of GRANACO Ltd. and offer possible solutions to that The financing problems of the enterprise trading with fodder ingredients and edible oil derive mainly from the different payment terms applied by suppliers and buyers. Suppliers – majority of them are manufacturers, as well – want to finance the production process from their own sources for the shortest possible period, thus they require either prepayment or define a payment deadline of just a few days following delivery. On the other hand, the enterprise could agree with the buyers in deferred payment terms only, which normally means due dates ranging from 30 to 60 days. In this way, the company’s expenses are due earlier than its incomes. Since the enterprise

could no longer finance the operation from its own capital, they needed to involve some external capital. The company considered the possible opportunities and finally decided to employ bank credit. They decided for a construction of Raiffeisen Bank Plc - the so called TCF – which is a short-term revolving type of credit that can be employed in forint and currency, too. Employing the credit provided the company the possibility to finance the purchases from the sales. As a central point of the construction, the company can call in the value of goods not sold and not paid for yet, and can use it to finance purchasing the goods. 62 http://www.doksihu This construction has the clear advantage of resolving the problem above, with the drawback of the much administration and prescriptions to meet. As the enterprise did not want to involve a third party in the company management, I started to study different alternative financial constructions. The comparison is of course really hard

without knowing any concrete conditions, so I focused on the benefits and drawbacks of the different solutions in my study. Factoring and current account credit both seemed quite promising. In my opinion, the enterprise and the bank found the optimal solution two years ago. Although it had to comply with severe conditions, the company received the necessary capital, while the bank could grant the credit under controllable conditions. Over the recent period, the bank could experience both the solvency of the company and its willingness to pay. The company had a significant account turnover, having no alignments and default payments. This is why Raiffeisen is planning to convert a part of the TCF into an overdraft credit. The company would definitely benefit from it, since calling in an overdraft credit involves much less administration, prepayments could be performed with no obstacles, and it could finance any costs from credit, which could be redeemed through the invoice of any

buyers. The best possible way for the company would perhaps be a full conversion of TCF into overdraft credit; however, there is practically no chance of this to be realised due to the severe requirements in terms of collateral. 63 http://www.doksihu VII. LIST OF TABLES AND FIGURES − Figure 1. The turnover of GRANACO Ltd., 2000-2004 − Table 1. The profit and loss account of GRANACO Ltd. The profit and loss account of GRANACO Ltd. Data in 000 HUF Nr. Description of the item A 1 B Previous year C 529437 Year under review E 847647 I. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Net sales revenues Capitalised value of own II. performance III. Other revenues IV. Material costs V. Payments to personnel VI. Depreciation VII. Other costs and expenditures A. Income from operations (I±II+III-IVV-VI-VII) VIII. Income from financial transactions IX. Expenses on financial transactions B. PROFIT OR LOSS FROM FINANCIAL TRANSACTIONS (VIIIIX) C. PROFIT OR LOSS OF ORDINARY

ACTIVITIES (±A±B) X. Extraordinary income XI. Extraordinary expenses EXTRAORDINARY PROFIT OR D. LOSS (X-XI.) E. INCOME BEFORE TAXES (±C±D) XII. Tax payable F. PROFIT AFTER TAXES (±E-XII) G. PROFIT OR LOSS FOR THE YEAR Modificati ons of the previous years D 299 507714 1329 651 996 19046 0 1563 824323 1326 1353 868 21340 2756 3625 -869 0 6499 5264 1235 18177 0 22575 126 0 0 126 18177 3279 14898 14898 0 22701 3299 19402 19402 0 Source: The annual report of GRANACO Ltd., 31 December 2002, p 11 64 http://www.doksihu − Table 2. The balance sheet of GRANACO Ltd., assets The balance sheet of GRANACO Ltd., assets Data in 000 HUF Nr. Denomination of the item A 1 2 3 4 5 6 7 8 9 10 B 11 A. I. II. III. B. I. II. III. IV. C. Fixed assets INTANGIBLE ASSETS TANGIBLE ASSETS FINANCIAL INVESTMENTS Current assets INVENTORIES ACCOUNTS RECEIVABLE SECURITIES LIQUID ASSETS Prepaid expenses Modificati Previous ons of the year previous years C D 1762 0 1762 116965 28386

52411 0 166576 43560 89618 33398 136 0 Source: The annual report of GRANACO Ltd., 31 December 2002, p 12 65 E 8028 8028 36168 87 118814 Total assets Year under review 174740 http://www.doksihu Table 3. The balance sheet of GRANACO Ltd., liabilities The balance sheet of GRANACO Ltd., liabilities Data in 000 HUF Nr. Denomination of the item A 12 13 14 15 16 B D. Shareholders’ equity I. ISSUED CAPITAL II. ISSUED CAPITAL UNPAID (-) III. CAPITAL RESERVE IV. ACCUMULATED PROFIT RESERVE V. TIED-UP RESERVE VI. REVALUATION RESERVE VII. PROFIT OR LOSS FOR THE YEAR E. Provisions F. Liabilities I. SUBORDINATED LIABILITIES II. LONG-TERM LIABILITIES III. CURRENT LIABILITIES G. Accrued expenses 17 18 19 20 21 22 23 24 25 26 Modificati Previous ons of the previous year years C D 21303 0 3000 3405 13803 14898 92024 19402 0 92024 5487 − Table 4. The evaluation of the financial indicators in the case of GRANACO Ltd. − Table 5. The evaluation of the qualitative aspects in

the case of GRANACO Ltd. Debtor rating categories applied by banks 66 132733 2138 130595 1302 0 Source: The annual report of GRANACO Ltd., 31 December 2002, p 13 − Table 6. E 40705 3000 4500 118814 Total liabilities Year under review 174740 http://www.doksihu VIII. APPENDIX − Appendix 1. The credit assessment datasheet of Raiffeisen Bank Plc.Dear Client! Data sheet For corporate clients Please take care to complete the form below to help us approving your request for credit quickly and objectively. Thank you for your cooperation in advance! All information regarding this data sheet can be found on our website at www.raiffeisenhu If you would like to receive the attached Data Sheet in digital format via e-mail, please contact our customer service colleague. Best regards: Raiffeisen Bank 67 http://www.doksihu HITELBÍRÁLATI ADATLAP 31. december 2002 COMPANY NAME: GRANACO Ltd. Please specify the data in thousand HUF based on month end data. Please complete

each line, including negative answers or zeros. I. General data Company Location: 2000 Szentendre, Dunakanyar krt. 14 Phone no.: 06-26-505098 Account no. at Raiffeisen Bank: 12042809-00380269-00100009 Tax reg.no: 12536108-2-13 Date of foundation (year, month): 02. 2000 Start date of business commencement, including predecessors if any (year, month): 02.2000 Average staff in year reviewed: 2 persons General manager’s name: Lóránt Ladó, József Székely Financial/Accounting manager (name, phone): Lóránt Ladó, 06-26-505098 Auditor (name, phone, delegation date): II. Béla Rudi, 06-42-508929, 20. 03 2000 Short description of credit/guarantee Aim: To finance counter value of goods Type: TCF Total: 425000 USD Expiry, redemption schedule: 68 http://www.doksihu 1 year, yearly extendable; continuously, within max. 60 days Source of redemption: Value of goods sold Safeties: Caution money, offsetting, mortgage found on rights and claims III. Business of the company

Major business: wholesale trade of grain, seeds, fodder Distribution of sales revenue among business fields relative to total sales revenue: wholesale trade of grain, seeds, fodder 100% % % Estimated market share in terms of major business field: 27% Main competitors: Bunge Rt., Agrograin Rt, Agrimpex Kft Changes in company’s business, clients, prices: no yes, the following: - Current orders on hand with expected sales revenue in current year: 1.000000 tHUF IV. Profit and loss account (previous, current year and expected next year data) Net sales revenue in previous year: 529.437 tHUF of export: 0 tHUF revenue of invested assets sold: 0 tHUF any kind of governmental/EU support: 0 tHUF depreciation: 651 tHUF interests and interest-like payables: 0 tHUF 69 http://www.doksihu Expected/planned financial data: Current year Next year Net sales revenue:

1.200000 tHUF 1.800000 tHUF Income from operations: 37.000 tHUF 51.000 tHUF Profit before taxes: 31.000 tHUF 46.000 tHUF Distribution of account turnover among accounting banks: Bank Share Raiffeisen Bank Plc. V. % % Assets Current capacity utilization: % Investments (change of invested assets): 2002. fact Investment in tangible assets, purchase Investment, assets brought to the business, purchase of share Sales of invested tangible or financial asset 2003. planned Description Total (tHUF) Description Total (tHUF) Purchase of device 7.200 Purchase of device 6.100 - 0 - 0 - 0 - 0 Stock value: stocks not moved for over 180 days: 0 tHUF interim stock record kept: Total accounts receivable: Five major customers: Net sales revenue Name previous year yes no 147.520 tHUF Expected sales revenue current year 70 Current gross receivable Business

contact from (year) Average payment deadline (days) http://www.doksihu 1. 2. 3. 4. 5. 252.350 144.200 122.570 108.150 93.730 297.500 170.000 144.500 127.500 110.500 Customer claims: 0 5.540 0 0 2.103 2000. 2000. 2000. 2000. 2000. 25 60 30 30 30 142.500 tHUF of late or overdue claims: 27.210 tHUF 1-30 days overdue: 27.210 tHUF 31-60 days overdue: 0 tHUF 61-180 days overdue: 0 tHUF over180 days overdue: 0 tHUF total doubtful debts of the above:0 tHUF name of largest customers of over 60 days overdue: from associated and other shared company: Other short-term receivables total: 0 tHUF 5.520 tHUF from tax authorities: 5.520 tHUF loans given: 0 tHUF shareholders: 0 tHUF other: 0 tHUF Details of loans given and other finances, collateral, guarantees (e.g: for companies, private persons, owners): Total Current Debtor Financing type (tHUF Expiry debt ) - - - - Redemption schedule Covers - - - Securities listed by type / value:

Nominal value and book value of private shares, repurchased shares: Type and value of insurances: Public liability insurance, CASCO, 219 tHUF 71 http://www.doksihu VI. Liabilities Short and long term bank credits, loans: Type of Total Bank available credit (tHUF) line Raiffeisen Lízing Long-term loan Current debt Expiry 1.955 2004.0131 2.870 Bank guarantees, letters of credit (L/C), collaterals received: Type of available Bank, collateral Aim Total (tHUF) credit line - - - - Redemption schedule 61.000 HUF/month Option Expiry Covers - - Other financing sources (member and other loans, leasing, long-term rent, vehicle loan, bill, factoring, etc.): ReSubject/Aim of Total Current Financer Expiry demption financing (tHUF) debt schedule - - - - Covers - Covers - Five major suppliers: Name Net purchase previous year Expected purchase in current year 72

Current gross payable Business contact from (year) Average payment deadline (days) http://www.doksihu 1. 2. 3. 4. 5. 245.350 175.250 119.170 91.130 70.100 293.530 185.250 119.100 120.340 85.930 Total payable to suppliers: 115.490 tHUF of late or overdue: 32.300 tHUF 1-30 days overdue: 5.270 2.110 0 3.140 0 2000. 2000. 2000. 2000. 2000. 20.100 tHUF 31-60 days overdue: 12.200 tHUF 61-180 days overdue: 0 tHUF over 180 days overdue: 0 tHUF new payment agreements, reschedulings (sum, supplier, expiry): 0 tHUF largest suppliers over 60 days overdue, expected settlement, payment agreements: - Other short term liabilities total: 17.100 tHUF to tax authorities: 16.100 tHUF dividend: 1.000 tHUF to shareholders: 0 tHUF wage: 0 tHUF other: 0 tHUF Has the company any overdue or rescheduled public debts (tax, social security, local tax, dues)? no yes, overdue: 0 tHUF yes, rescheduled: 0 tHUF Any kind of overdue debt, not settled for due date (beyond above

supplier and public debts): no yes, the following: - 73 8 3 2 2 2 http://www.doksihu Legal procedures against the Company or its owners, with subject, value and expected outcome: no VII. yes, the following: - Ownership background, shares Ownership-structure of the company: Name Lóránt Ladó József Székely Owned share (%) 50 50 Business field wholesale trade of grain, seeds, fodder Share capital* 3.000 Annual net sales revenue* 847.647 Type of business contact* - Name of private person having significant power in company (group) management: Any changes in ownership-structure during last 3 years no yes, the following: - Affiliated companies, shares and investments of the company: Name Owned share (%) Business field Share capital* Annual net sales revenue* Type of business contact* - - - - - - Any changes in the interested corporation of the company (or its owners): there is no such company not changed during last 3 years: - Other enterprises of the

owners (or their relatives) of the company: 74 changes: - http://www.doksihu Name Owned share (%) Business field Share capital* Annual net sales revenue* Type of business contact* - - - - - - *if it is a business corporation * e.g customer, supplier, sub-contractor, paid work, creditor, or a member of a circle of consolidation Please attach the annual report and the trial balance to the completed data sheet! I hereby certify that the above data are valid. Date: 09.032003 Proper signature: 75 http://www.doksihu Annexes: A. 1. 2. 3. 4. 5. 6. 7. 8. B. 1. 2. 3. 4. 5. C. 1. 2. 3. 4. Documents required for a credit request Credit Request Form Credit Assessment Data Sheet (present document) Annual Report of the last 2 years with annexes (Balance Sheet, P&L statement, Auditor Report, Notes on the accounts, Business report) Closed trial balance statement of the last quarter Financial and business plan for the duration of credit Company information brochure, list of

references, major individual and general contracts Certificate of APEH-TB (Tax Authority, National Health Service) (earlier than 60 days) Certificate of VPOP (Hungarian Customs and Finance Authority) (only in case of importer company or company dealing with products subject to excise duty; the certificate must be earlier than 60 days). Documents required for account opening Authorised copy of valid version of Deed of partnership or Charter of foundation Abstract of companies register (earlier than 30 days) Specimen of signature of persons authorised to issue corporate signature certified by notary public Bank’s signature form, completed Bank’s account opening form, completed Extension or monitoring Documents no. 2-4 listed in clause A are required to be sent to the Bank every year, The Quarter Datasheet and Trial balance is to be sent to the Bank quarterly, the Bank should fully be informed about any changes in the operation, market position, ownership structure of the Company,

or any overdue public or bank debts, as well as any other materials, documents and information required by the Bank should also be sent in. IX. BIBLIOGRAPHY 76 http://www.doksihu Newspaper or magazine articles 1. Belyó, Pál: Keyword: Competitiveness (Kulcs a versenyképesség), Cégvezetés, 2003. június, p 96-102 2. BVJ: Credit assessment (Hitelbírálat), Cégvezetés, 2003 június, p126-129 3. Kotulyák, Éva: Financial subsidies for enterprises (Pénzügyi támogatások vállalkozásoknak), Cégvezetés, 2004. november, p72-80 4. Lőrincz, Vilmos: Banks about small enterprises (Bankok a kisvállalkozásokról), Cégvezetés, 2003. november, p118-122 5. Money immedieately (Pénz azonnal), Üzlet és Siker, 2003 március, 2003/2, p4041 6. Szűcs, Gábor: The economic environment – through the eyes of entrepreneurs I (A gazdálkodási környezet – vállalkozói szemmel I.), Cégvezetés, 2005 február, p5356 Books 1. Gellért, Andor: Bank transactions (Banküzletek),

Közgazdasági és Jogi Könyvkiadó, Budapest, 1993, p. 61-89, 145-167 2. Hajós, Edit – Tóth, Zoltán: An introduction to credit risk management (A hitelkockázat kezelése), Panem, Budapest, 1993, p. 72-223 3. Dr Husti, István: Handbook to projects for entrepreneurs and companies (Beruházási kézikönyv vállalkozóknak, vállalatoknak), Műszaki Könyvkiadó, Budapest, 1999, p. 303-319, 345-366 4. Kolb, Robert – Rodriguez, Ricardo: Principles of Finance (A pénzügy alapelvei), 2nd edition, D.C Health and Company, Lexington, 1992, p 477-524 5. Schlosser, Michel: Corporate Finance: A model-building approach (Vállalati finanszírozás: Egy modelt kialakító megközelítés), 2nd edition, Prentice Hall, New York, 1992 6. Shetty, Anand – McGrath, Francis – Hammerbacher, Irene: Finance: An integrated Global Approach (Pénzügy: Integrált globális megközelítés), Austen Press, Illinois, 1995, p. 375-455, 554-586 7. Dr Sóvágó, Lajos: Credit assessment

(Hitelbírálat), Unió, Budapest, 2001, p 5-155 77 http://www.doksihu 8. Szőkéné Buzáth, Márta: Bank transactions I – Credit transactions (Bankügyletek I – Hitelügyletek), Tri-Mester, Tatabánya, 1999, p. 19-79 9. Dr Sztanó, Imre – Korom, Erik: What is shown by the balance sheet (Amit a mérleg mutat), Saldo, Budapest, 2002, p. 11-190 Other sources 1. Annual Report of GRANACO Ltd, 31 December 2002 2. Credit contract between GRANACO Ltd and Raiffeisen Bank Plc 3. Credit assessment datasheet of Raiffeisen Bank Plc 78