In a previous post, I mentioned that a loan and a line of credit serve the same purpose.  While that may be true in a broad sense, they actually can be quite different.  Hence, the different names.  The bank will look at both types of credit the same way, evaluating the amount of credit requested against the amount and type of collateral offered.  The customer, however, only cares about one thing, which option is cheaper.

Loan

Credit, as we all know, is money the bank gives you as a short term gift, so to speak.   A loan, then, can be viewed as a lump-sum gift.  We are generally familiar with loans when buying cars or homes.  These loans are for relatively long amounts of time where the borrower pays back the credit a little at a time, either monthly or quarterly, until the end of the loan term when — poof — the amount borrowed has all been paid back.

Bridge Loan

A bridge loan is different from the above loan.  The biggest difference between the two types is that a bridge loan is generally for a shorter period and is paid back in one payment, full, at the end of the loan’s term.  These type of loans are usually against an expected income/donation and function similarly to lines of credit.  A bridge loan is advantageous when the customer needs all of his credit limit right away and is expecting to pay it back in one shot.

Line of Credit

A line of credit is not a gift at all, but more of an understanding between the client and the bank.  The bank will allow the account to go into a minus up to a pre-agreed amount.  This type of credit is useful when the length of time that an organization will be in debt is known but the amount is not known.  During this credit period, depending on incomes received and daily activities, the actual amount of credit used could vary.  Some days the account is in minus and some days not.  Some days the entire line is used and other days only a portion.  The advantage of the line of credit is its flexibility; the customer is only charged interest for what is used.  Like the bridge loan, there are no interim payments for the line of credit, just the requirement to repay the credit in full when the period ends.  Assuming an organization knows from the beginning that it will be using all of its line of credit for the entire length of the debt period, a bridge loan is going to be a better option.

Show Me the Money

Built into the flexibility of a line of credit is a higher interest rate than that of a loan.  Over the term of the line of credit, because the full amount is rarely used, this option incurs less interest fees than a loan — despite its higher rate of interest.  Loans have a lower rate of interest but you need to borrow the entire amount from the bank.  If in the end you didn’t need the loan, tough luck and pay up.

Fees Involved

Both options will have two fees attached to them.  First, is the interest on the credit used.  Call it a gift or an understanding, anytime you use money that you technically don’t have, you’re going to pay for it.  Lines of credit will be based on Prime, which is based on the Bank of Israel’s interest rate, thus, subject to change.  Loans may also be based on Prime or fixed.  Second, both options will also have a one-time handling fee, as well.  Lines of credit might call these fees “credit allocation” (amalat haktza’at ashrei) while loans might refer to them as “preparation” (hachanat tefasim) or “folder opening” (petichat tik) fees.  These one-timers are generally based on a percentage of the credit being taken and may be dependant on the lenght of the credit, as well.

Be aware that business customers may get quoted higher rates than individual customers, as stipulated by the new Fee Law that went into effect July 2008.  Unfortunately, any nonprofit that has a yearly cash flow of over one million NIS is considered a business as far as the Bank of Israel is concerned.

Questions to Ask your Banker

• How much is the interest?
• Is the interest variable (based  on Prime) or fixed?
• How much is the handling fee?
• For loans, can you pay them back early? Is there a penalty involved?
• For lines of credit, what fees can I expect if none of the credit is used?  Are there any penalties?
• Are there any additional fees?
• What is the bank using as collateral?
• What promises/commitments have I made to the bank?

While I have provided a list of the basics, please, please, please, remember that each bank is slightly different.  Ask your banker any and all questions you think are relevant,  “The only stupid question is the one not asked.”

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

It is logical to assume that if a bank wants to appeal to the nonprofit community then it has to understand the nonprofit organization’s way of thinking (that’s where I come in).  The opposite should also be true.  If a charitable institution wants to appeal to a bank then it must understand the bank’s way of thinking. This is especially the case when using or applying for credit from a bank.

In the past two months alone, four organizations have turned to me trying to understand why their bank was acting a certain way when it came to credit. A few examples:

• One organization had a large line of credit in one account that was guaranteed by cash in a different account. As far as the nonprofit was concerned, this wasn’t credit and should, thus, not be charged any accrued interest fees.
• Another organization didn’t understand why its Israeli bank felt uncomfortable giving a temporary line of credit against a foreign currency check deposited in its account. After all, the bank had the “cash.”
• A charity was upset that a bank didn’t want to approve a mortgage backed by the property that was being purchasing. The institution was convinced that its request was backed by solid collateral.

I wanted to take the opportunity over the next few blogs to review how a bank looks at certain types of credit and what steps an organization can take to make itself more appealing to a bank. First, let’s start with the basics and review the various types of credit available.

Overview

• Checks
• Credit Card
• Line of Credit
• Loan
• Mortgage
• Bank Guarantee / Letter of Credit

Checks

• Checks are promises. Checks are trust. Let us be absolutely clear, checks are not cash.
• Checks can be rejected, bounced, or not honored. Cash can be immediately used, or if you prefer, stored in a mattress or placed in a medium to large size swimming pool.
• In Israel, checks can be bounced for lack of funds only on the day after the check is deposited.
• In America, checks can be rejected up to a half a year or a year later. I have seen cases where a US dollar check cleared and the client used the money only to have the US bank call and bounce the check a month later.
• Banks do not want to put themselves in a position where they or their client will have already used the funds of the check, only to find that the check bounced a few days or weeks later (as seen above).
• Expect to wait at least two days for Israeli checks to clear.
• Foreign currency checks are cleared either through the bank (expect at least 7 business days) or through collection (anywhere from two weeks to two months).

Credit Cards

• A credit card in Israel are different that in the States and other places.
• In Israel, the cards are quasi-debit cards (with only one exception that I know): Debit cards, because the card is created and guaranteed through a bank (see below); Quasi because the payments do not come immediately out of an account, but rather only once a month.
• Credit cards are guaranteed by the bank. In other words, whether or not a client has money in his or her account, the bank is forced to by the bill.
• Credit card bills must be paid IN FULL on their due date.
• Because banks assume full responsibility of a card, the credit line will always be against some sort of security/collateral. Collateral can include expected salary (personal accounts), existing mortgage, or cash.

Line of Credit

• As of a few years ago, the Bank of Israel decreed that no account can have a line of credit without prior approval and request of the client. In short, the client has to sign more forms than before.
• Depending on the bank, this may hamper its ability to release credit on the same day or to cover a minus in the account that was incurred the previous day.
• One does not need to use a line of credit. It is an optional loan, so to speak.
• Banks differ in their fees for establishing a credit line. Some fees are not even based on whether the line is used. Fees can include interest (if line is used) and/or a credit issuance fee (amalat haktza’at ashrei). Speak to your bank to get all the fine print.
• Like credit cards, lines of credit are traditionally issued against expected salary (personal accounts), existing mortgage, or cash.

Loan

• Loans and lines of credit serve the same purpose.
• Loans generally come with a filing or processing fee (pitichat tik). The name can vary, depending on the bank. This fee may or may not be a percentage of the loan (check this out).
• Check with the bank about early repayment fees. Some banks have, others don’t. Prices and conditions vary.
• Loans are traditionally issued against contracts (business/nonprofit accounts), cash, guarantors, stock, property or cash.

Mortgage

• Mortgages are essentially loans, issued only against property.
• Unlike, general collateral, in mortgages, the property is intrinsically linked to the loan. The property cannot be used as security for any other dealings between a client and the bank.  This can only be changed with the bank’s and client’s approval and , of course, subsequent additional paperwork.

This is only the tip of the iceberg. I will be dealing with various nuances and applications in future posts.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey