Debt Assignment is the transferring of a debt,
and all the associated rights and obligations, from a creditor to a third
party, often a debt collector. Debt assignment could occur with individual
debts and business debts. The company that is assigning the debt does so, in
order to improve its liquidity and/or to decrease the amount of risk it is
exposed to.
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Absolute
Assignment and Transfer of Loans: Is it the sensible thing to do and what steps
should one take when doing it?
The
absolute assignment and transfer of loans is a very lucrative way for
businesses which have taken out loans to raise capital, surprisingly though,
only a few avail themselves to it. The fact that very few are aware of it might
be a stumbling block, however, every business that has loans should look at
getting an absolute assignment and transfer of loans once, at the very least,
during the lifespan of a particular loan. The absolute assignment and transfer
of loans is able to reduce the business’s rate of interest on loan therefore
creating an opportunity to make a saving on the interest payments resulting in
direct cash injection for the business. The balance sheet levels of a business
are dynamic and while you’re currently making five million dollars per annum,
this might be substantially more compared to what your balance sheet recorded
two years ago. The absolute assignment and transfer of loans is a fantastic way
to re-examine, make changes and tweaks according to the requirements that exist
in the liabilities of your balance sheet.
A
lot of financial institutions provide an allowance to top up a loan with an
absolute assignment and transfer of loans, indicators show that this is the
reason for personal loans and home loans. It should however be stated that, the
principle motivation behind Absolute Assignment and Transfer of Loans is to aid
in the lessening of the burden of the company debt and it is not advisable for
a company to opt for a top up loan, we do also agree that, there are situations
that make it absolutely necessary to take such a loan.
An
absolute assignment and transfer of loans makes sense if for instance; your
business has a business loan for $ 250,000 running for a period of 3 years at a
rate of 20% interest, which should bring your equated monthly installment (EMI)
to $ 9,291. This means that on the whole for the tenure of the loan the
interest owed by the business will come to an amount totaling $ 84,472.
Assuming that the business avails itself to an absolute assignment and transfer
of loans after 12 months and gets a reduction in the interest rate to 14%,
therefor resulting in the original amount of outstanding money being reduced to
$ 176,299. So, the Absolute Assignment and Transfer of Loans of monies still
owed when rounded off to the next common denominator is $ 180,000, and the
monthly EMIs are $ 8,642 this in turn brings the total payable interest down to
$ 27,416. Now, remember that, during the initial 24 months’ period, your
business would have already made payments amounting to $ 44,039 towards said
loan which means another $ 40,433 will be required in order to recover the
loan. However, because of the absolute assignment and transfer of loans the
business is now owing a total interest of $ 27,416, which means an immediate
direct cash injection of $ 13,000 is recorded in the books of the business.
With
reference to the above example, if, the loan period can also be reduced to a
year, and if your income statements provide a cushion for this, you will get
even cash injections in the form of interest payable. The business will enjoy a
$ 26,493 increase, but this will also increase monthly EMIs to a steep $
16,162.
Similarly,
if you have a business loan for two and a half million dollars at 13.5 % for a
period of 20 years, the business has to pay monthly EMIs amounting to $ 30,184.
The total Interest the business pays during this 20-year tenure amounts to $
4,744,248. Following in the same light as the example above and after a year
the business opts for an absolute assignment and transfer of loans, which in
turn then reduces the rate of interest to 12%, meaning that the principal
outstanding is $ 2,473,700. Notice that the principal amount hasn’t decreased
by a lot, this mainly because $ 335,912 has gone towards the fulfillment of
payments owed to interest.
Assuming
that the business has chosen the absolute assignment and transfer of loans
during this 12% stage at $ 2,480,000 say for another 20 years, notice immediate
reduction in the total payment of interest owed by the company is $ 4,073,665
resulting in a saving of more than $ 330, 000. The following exercise brings
down the monthly EMIs to $ 27,307 which I am sure you agree that, that is a
much more manageable figure.
The
beautiful thing about the absolute assignment and transfer of loans is that it
has no limit on the number of absolute assignment and transfers on the loan and
as the income of the business increases so too does the propensity to fulfill
said loan. It is considered as good practice to opt for the absolute assignment
and transfer of loans every 36 to 60-month period, which essentially means that
the business will be repaying its loan sooner if the income keeps increasing
and thus enjoy the benefits of reduced interest rates. It is common practice
for institutions to reduce the rate of interest by as much as 25 basis points,
but this usually happens at later payment periods but even the small reductions
can more often, mean a lot towards the overall balance sheet of a company.
The Business Own Corporation MIND Repository is an incubator of corporate documents find the Absolute Assignment and Transfer of Loans and other assignment/transfer and loan agreements.
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