Business Case - Truck Financing

1. Business Case – Truck Financing
BUSINESS CASE
Truck Financing
Players
Truck Manufacturer (TM)
Buyers of Trucks
Dealers
Truck Financer (TF)
Commodity: Trucks
Role
TM: They are the truck manufacturer
Buyer: They are the buyers and end-users of the trucks. They can be located in any
part of India
Dealer: They are the authorized dealers of trucks and presently located in some
major cities and in future can be located in any part of India. They are the go-
between TM and the buyer
Financer: They would finance the truck to the buyer. They would assess the buyer’s
capability and accordingly arrange the finance through Factoring or Bill Discounting.
Maximum Percentage of Financed Amount: 90%
Author: Partho H. Chakraborty 1

2. Business Case – Truck Financing
Minimum Amount Buyer Pays: 10%
Tenor:
1. The minimum tenor of loan is for 6 months.
2. The maximum tenor of loan is for 60 months.
Note: Exceptions can be for 84 months
Time Frame
1. Maximum 28 Days to process the papers and handing over the Delivery Order
(DO) to the Dealer by TF
Security:
1. Promoter’s Personal Guarantee
2. Truck hypothecated to TF
3. Post Dated Cheques
Requirement:
TM needs a solution which will map the process flow from the moment the customer
approaches the dealer for a truck to the financing of it. It continues from there to
collections each month and also extends to recoveries in case of defaults.
Author: Partho H. Chakraborty 2

3. Business Case – Truck Financing
It should calculate the IRR and map the risk of defaults. It should also profile the
customer showing the behavioral analysis. In case of default, it should map the
recovery process till payments are completed or the asset is possessed.
The solution should calculate taxes and commissions and must also calculate the
depreciated value of the asset year after year till the payments are completed and
the assets are written off the books.
Transaction:
1. Buyer approaches dealer and makes an enquiry regarding purchase of trucks.
2. Dealer informs the customer the basic requirements and passes on
information regarding the enquiry to TF and TM.
3. The customer gives the TF all the documents
4. TF whets the documents and decides to finance the truck or not. If ‘yes’ then
the tenor and amount of loan is mentioned and if ‘no’ a polite rejection letter is
sent
5. The customer must give his acceptance or his rejection on the offer
6. If he accepts the offer then the customer gives TF and post dated cheques.
7. TF then sends DO to the Dealer.
8. The dealer gives the DO to TM and TM gives the truck to dealer.
9. The dealer gives the delivery of truck to the buyer.
10. The customer pays TF Equated Monthly Installment (EMI) every month till all
the payments are made.
11. Transaction Ends
Author: Partho H. Chakraborty 3

4. Business Case – Truck Financing
Note:
1. In case of defaults TF will follow up for payments till the EMI’s are completed
or the asset is possessed. If need be it could restructured.
2. The customer also needs to renew insurance every year.
3. In case of pre-payment of the loan, the system will calculate the pre-payment
penalty charges and foreclose the loan.
Indicative Cost:
Payments: TF
S.No. Particulars Amount (`)
1. Cost of Truck 2,500,000=00
2. Taxes (@12.5%) 312,500=00
3. Commission to Dealer (@2%) 50,000=00
TOTAL 2,862,500=00
Receipts: TF
S.No. Particulars Amount (`)
1. Down Payment (@ 10% of Total Cost) 250,000=00
2. Taxes (@12.5%) 312,500=00
3. First EMI 53,527=34
TOTAL 616,027=34
Note:
1. EMI is calculated @ 15% for ` 2,250,000 for 60 Months
2. 59 Cheques for ` 53,527=34 is taken from the customer, if the customer does not opt
for ECS, SI, etc.
3. This is an indicative example not the actual working and the Cost of Truck is just
indicative
Author: Partho H. Chakraborty 4

5. Business Case – Truck Financing
Flowchart: - THE FIRST PART
The Process Flow to acquire a Truck
18
15
Customer 2 Dealer
1
14 3 16 17
5
7 4 TF
10 9 6
TF
11 Rejects Offer
8
Customer 12
Transaction Ends
13
Author: Partho H. Chakraborty 5

6. Business Case – Truck Financing
Table.
STEP DAY EVENT
NO. NO.
1. 1 Customer approaches Dealer with enquiry
2. 1 Dealer entertains the customer, gets preliminary details
3. 1 Dealer passes the enquiry to TF
4. 3 TF contacts the customer and gives him the list of the documents
5. 8 Customer gives TF the documents required
6. 15 TF whets the documents and carries out a Risk Assessment of the customer’s
probability to default
7. 16 If TF does not find the customer credit-worthy it informs the customer and sends it a
polite rejection letter
8. 16 TRANSACTION ENDS
9. 16 If TF finds the customer credit-worthy it informs the customer and sends it a letter for
the same
10. 18 Customer gets an acceptance letter and considers it’s terms and conditions
11. 20 If customer rejects the offer he communicates the same to TF
12. 20 TRANSACTION ENDS
13. 20 If customer accepts the offer he signs his acceptance and gives it to TF
14. 21 Customer signs a contract with TF
15. 25 Customer makes the down payment to the dealer and gives the dealer the
acceptance letter from TF
16. 25 Dealer sends TF intimation regarding receipt of down payment
17. 26 TF gives dealer D/O
18. 27 Dealer releases the truck to the customer
75/145 TRANSACTION ENDS
Note: The days are taken on an approximate basis and is an indicator to the time
taken for the process
Author: Partho H. Chakraborty 6

7. Business Case – Truck Financing
Flowchart: - THE SECOND PART
The Process Flow to service the loan after it is disbursed
6
Payments
CUSTOMER A
5
7 8
Investigations
1 9
TF BANK
Restructure
2 10
New Payment Terms 12
3 Status
Can he pay
13
4
11 A 14
Steps Taken Why not Possessed 17 Asset
21 Repossessed
18 25
A
Asset Cost Recovered 15
Asset Does
Not Exist Asset Repossessed
20
19 16
Transaction Ends
23
Is it Asset in
Litigation?
24
Steps Taken to 25
Repossess the Asset A
22
Author: Partho H. Chakraborty 7

8. Business Case – Truck Financing
STEP EVENT
NO.
1. TF sends cheques to the bank for payment
2. Bank sends cheques for clearing
3. IF cheques are cleared TF gets the credit
4. If the cheques are not cleared then bank returns cheques to TF
5. TF informs customer of returned cheques
6. Customer re-initiates the process for payments
7. The customer can give a new cheque or can ask TF to represent the bounced cheque
8. The customer may not be able to make any payment and TF would investigate the
matter
9. The customer is given a restructuring of his payments
10. Customer accepts restructuring offer with new payment terms
11. Fresh cheques are issued to TF
12. Customer does not accept restructuring offer with new payment terms. So can he
pay?
13. If customer can pay then customer re-initiates the process for payments
14. Customer cannot pay as he is bankrupt so is the asset repossessed
15. Asset is repossessed
16. Transaction Ends
17. Asset not repossessed, so why was it not repossessed
18. Does the asset exist
19. Is the asset in litigation or is it a write-off or in a very poor condition
20. If asset does not exist then what steps are being taken such as Insurance recover the
cost
21. Asset Cost Recovered
22. Transaction Ends
23. If under litigation or write-off then what steps are being taken such as Insurance
recover the cost
24. It the asset is not under litigation or write-off then what steps are being taken to
repossess it
25. Is the asset repossessed and the process follows logically
TRANSACTION ENDS
Author: Partho H. Chakraborty 8

9. Business Case – Truck Financing
Sub Procesess
1. Risk: When TF would whet the customers it would profile them for probability
of default. This should also preferably cover the customer behavioral pattern
especially in a default situation.
2. Defaults: The Collection Process must come in picture with reminders, follow-
ups including restructure of loans to repossession of assets.
3. Insurance: The CRM must call up the customer a week prior to the expiry of
insurance and remind the customer that their insurance is pending for
renewal. It must follow-up till the insurance is renewed and the policy details
are entered in the system.
4. Contracts: The contract can be one simple contract such as:
1 Contract 1 Truck or 1 Contract Multiple Trucks
5. Payments: The payments must configure the following –
a. Post Dated Cheques Processing
b. 1 Cheque 1 Truck
c. 1 Cheque Many Truck
Author: Partho H. Chakraborty 9

10. Business Case – Truck Financing
Note: Names if any are Suggestive only and without any relation to any real entity
whatsoever. It is only to give a feel and touch of how transactions can be
structured and names are indicative
This article is meant for education purposes only and it is not be reproduced
for any commercial purpose by print or electronic medium whatsoever
This case study is written by:
Partho H. Chakraborty
A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore -
560 037, India
Tel: +91 80 420 50293, Cell: +91 99863 22504
email: parthohc@airtelmail.in; parthohc@rediffmail.com
Skype: parthohc01
Author: Partho H. Chakraborty 10