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STAGE SEVEN
Closing

ATTRACTION OF THE BEST OFFER

 

This guide describes all the steps, processes, and scope of Closing.

 

1.1. What Is Disbursement?

 

Disbursement means paying out money. The term disbursement may describe money paid into a business' operating budget, the delivery of a loan amount to a borrower, or dividend payment to shareholders. An intermediary, such as a lawyer's payment to a third party on behalf of a client, may also be called a disbursement.

 

To a business, disbursement is part of cash flow, and it is a record of day-to-day expenses. If cash flow is negative, meaning that disbursements are higher than revenues, it can be an early warning.

 

A disbursement is the actual delivery of funds from a bank account.

 

KEY TAKEAWAYS

 

  • A disbursement is the actual delivery of funds from one party's bank account to another.

  • In business accounting, an assignment is a payment in cash during a specific period and is recorded in the business's general ledger.

  • This record of disbursements shows how the business is spending cash over time.

  • Dividends to shareholders are often termed disbursements, and student loan money paid into a school's account on behalf of a student is termed a disbursement.

 

1.2. How Disbursement Works

 

In bookkeeping, a disbursement is a payment made by the company in cash or cash equivalents during a set period, such as a quarter or a year. A bookkeeper records each transaction and posts it to more ledgers, such as a cash disbursement journal and the general ledger.

 

An entry for a disbursement includes the date, the payee name, the amount debited or credited, the payment method, and the purpose of the payment. The overall cash balance of the business is then adjusted to account for the disbursement.

 

Disbursements are records of the money flowing out of business and differ from actual profit or loss. For example, a company using the accrual method reports expenses when they occur, not necessarily when they are paid, and reports income when it is earned, not when it is received.

 

The type of items listed in the ledger depends on the business. A retailer has payments for inventory, accounts payable, and salaries, and a manufacturer has transactions for raw materials and production costs.

 

Managers use the ledgers to determine how much cash has been disbursed and track it. For example, management can see how much money is spent on inventory compared to other costs. Since the ledger records the numbers of the checks issued, the managers also can see whether any reviews are missing or wrongly recorded.

 

IMPORTANT

 

A disbursement is a cash outflow, and it can be any form of payment.

1.3. Types of Disbursement

Other, more obscure uses of the word disbursement include the controlled disbursement and the delayed disbursement (also called the remote disbursement).

1.4. Controlled Disbursement

 

Controlled disbursement is a cash flow management service that banks make available to their corporate clients. It allows them to review and reschedule disbursements on a day-to-day basis. That will enable them to maximize the interest they earn on their accounts by delaying the precise time that an amount of money is debited from the account.

 

1.5. Delayed Disbursement

Delayed disbursement, also called small allocation, is deliberately dragging out the payment process by paying with a check drawn from a bank located in a remote region. When a bank could process a payment only when the original paper check was received, this could delay the debit to the payer's account by up to five business days.

 

The widespread acceptance of an electronic copy of check-in instead of the original paper check has made this tactic hard.

 

1.6. Disbursement vs. Drawdown

 

FAST FACT

 

A withdrawal from a retirement account is termed a disbursement. Once the money is disbursed, it is recorded as a drawdown of the balance.

 

As noted above, a disbursement is a payment. A drawdown, however, is a consequence of a particular type of disbursement.

 

If you take money out of a retirement account, you receive a disbursement of funds, and that disbursement represents a drawdown on the balance in your account.

 

Say you're a retiree, and you withdraw 10% of a $100,000 balance in a traditional IRA account. That $10,000 you receive is a disbursement from your IRA, and it also represents a drawdown of $10,000, or 10%, from your account, which now has a balance of $90,000.

 

A drawdown is a measure of a decline from a historical peak. A 10% reduction in the size of a military force might be described as a 10% drawdown of troops. An oil company that exploits 3% of its proven oil reserves will record a 3% drawdown of its supply.

 

1.7. Examples of Disbursements

While pursuing a legal case, an attorney must keep a record of the client's disbursements. This may include payments to various third parties for costs incurred, including court fees, private investigator services, courier services, and expert reports.

 

Properly documenting these costs is crucial in a legal case to accurately determine the client’s losses and create an understanding of claimed damages. The attorney must notify the client and the insurance company before incurring high disbursement costs, and the client must reimburse the attorney.

1.8. Positive and Negative Disbursement

A loan disbursement may be positive or negative. Positive disbursement results in a credit to an account, while a negative disbursement results in an account debit. A negative allocation may occur if financial aid funds are overpaid and later withdrawn from the student's account.

 

1.9. Disbursement FAQs

Here are the answers to some commonly asked questions about disbursement.

 

1.9.1. What Is a Loan Disbursement?

A loan is disbursed when the agreed-upon amount is paid into the borrower's account and is available for use. The cash has been debited from the lender's account and credited to the borrower's account.

 

1.9.2. Is a Disbursement a Refund?

In the U.S. Department of Education's Office of Federal Student Aid, a disbursement is the actual payment of the funds into an account that will support a student's studies in the upcoming semester. If the loan amount exceeds the true costs of tuition and fees, a refund of the excess is paid directly to the student.

 

1.9.3. What Is the Difference Between a Disbursement and a Payment?

A disbursement is a payment, and the word disbursement implies an amount that has been finalized and has been appropriately recorded as a debit on the payer's side and a credit on the payee's side.

 

1.9.4. What Is a Disbursement Fee?

A disbursement fee is usually a vendor's charge to cover payments made by the vendor in its work on behalf of a customer. For example, FedEx may pay duty and tax charges for a shipment on behalf of a customer and then add a disbursement fee to its bill to the customer to cover the payments.2

 

1.10. The Bottom Line

A disbursement is a payment that has been completed and recorded as such, and it has been debited from the payer's account and credited to the payee's account. In business, the regular recording of all cash disbursements is required to keep tabs on the business's expenditures. In the wider world, the word disbursement is used in various contexts, from crediting student loan money to finalizing a withdrawal from a retirement account.

 

2. Contract Provision

2.1. What Is a Contract Provision?

 

A contract provision stipulates a contract, legal document, or law. A contract provision often requires action by a specific date or specified period. Contract provisions are intended to protect the interests of one or both parties in a contract.

 

2.2. How a Contract Provision Works

 

Contract provisions can be found in laws, loan documents, and contract agreements, and they also can be found in the fine print accompanying purchases of some stocks.

 

KEY TAKEAWAYS

 

  • A contract provision stipulates a contract, legal document, or law.

  • A contract provision often requires action by a specific date or within a certain period.

  • One of the most familiar uses of a contract provision is a bond’s call provision, which refers to a specific date; after that, the company may recall and retire the bond.

 

For example, an anti-greenmail provision is a type of contract provision contained in some companies' charters that prevent the board of directors from paying a premium to a corporate raider to drop a hostile takeover bid.

 

In loan documents, a loan loss provision is a contract provision that details an expense set aside to allow for uncollected loans or loan payments. This provision is used to cover several factors associated with potential loan losses.

2.3. Special Considerations

 

Many laws are written with a sunset provision that automatically repeals them on a specific date unless legislators reenact them. A sunset provision provides a repeal of the entire law—or sections of the law—once a particular date is reached.

 

For example, the National Security Agency’s (NSA) authority to collect bulk telephone metadata under the USA PATRIOT Act expired at midnight on June 1, 2015. Any investigations started before the sunset date was allowed to be completed. Many sunsetted portions of the Patriot Act were extended through 2019 with the USA Freedom Act.

 

However, the provision allowing the collection of massive phone data by government agencies was replaced with a new requirement that phone providers hold this data.

 

This practice of sunsetting has its parallel in business. For example, a sunset provision in an insurance policy limits a claimant’s time to submit a claim for a covered risk. If the claimant does not act within the defined period, the right to make a claim is forfeited.

 

2.4. Example of a Contract Provision

 

One of the most familiar uses of a contract provision is a bond’s call provision. A bond's call provision refers to a specific date; the company may recall and retire the bond after this date. The bond investor can turn it in to pay the face amount (or the face amount plus a premium).

 

For example, a 12-year bond issue can be called after five years. That first five-year period has rugged call protection, and investors are guaranteed to earn interest until at least the first call date. When an investor buys a bond, the broker typically provides the yield to call and maturity, and these two yields show the bond’s investment potential.

 

If a bond has a soft call provision, the procedure will effect after the hard call provision period passes. Soft call protection is typically a premium to face value that the issuer pays for calling the bond before maturity. For example, after the call date is reached, the issuer might pay a 3% premium for calling the bonds for the next year, a 2% premium the following year, and a 1% premium for calling the bonds more than two years after the hard call expires.


3. Contractual Execution

 

3.1. What Is an Execution?

 

Execution is the completion of a buy or sells order for a security. The execution of an order occurs when it gets filled, not when the investor places it. When the investor submits the trade, it is sent to a broker, who then determines the best way to execute it.


KEY TAKEAWAYS

 

  • Execution refers to filling a buy or sell order in the market, subject to conditions placed by the end client.

  • There are several ways to execute a trade, and they encompass manual and automated methods.

  • Brokers are required by law to find the best possible means to execute a client's trade.

 

3.2. Understanding Execution

 

Brokers are required by law to give investors the best execution possible. The Securities and Exchange Commission (SEC) requires brokers to report the quality of their performances on a stock by stock basis and notify customers who did not have their orders routed for the best execution.1 The cost of executing trades has been significantly reduced due to the growth of online brokers. Many brokers offer their customers a commission rebate to achieve a certain amount of trades or dollar value per month. This is particularly important for short-term traders where execution costs need to be kept as low as possible.

 

If the order placed is a market order or an order that can be converted into a market order relatively quickly, then the chances of settling it at the desired price are high. But there might be instances, especially in the case of a large order broken down into several small orders, when it might be challenging to execute at the best possible price range. In such cases, execution risk is introduced into the system. The risk refers to the lag between the placement of an order and its settlement.

 

3.3. How Orders Get Executed

 

  • Order to the Floor: This can be time-consuming because a human trader processes the transaction. The floor broker needs to receive the order and fill it.

  • Order to Market Maker: Market makers are responsible for providing liquidity on exchanges such as the Nasdaq. The investor's broker may direct the trade to one of these market makers.

  • Electronic Communications Network (ECN): An efficient method whereby computer systems electronically match up buy and sell orders.

  • Internalization: If the broker holds an inventory of the stock in question, it may execute the order in-house. Brokers refer to this as an internal crossing.

 

3.4. Best Execution and Broker Obligations

 

Brokers are obligated to give each investor the best possible order execution by law.1 There is the debate over whether this happens or if brokers are routing the orders for other reasons, like the additional revenue streams we outlined above.

 

Let's say, for example, you want to buy 1,000 shares of the TSJ Sports Conglomerate, which is selling at the current price of $40. You place the market order, and it gets filled at $40.10. That means the order costs you an additional $100. Some brokers state that they always "fight for an extra one-sixteenth," but in reality, price improvement is simply an opportunity and not a guarantee. Also, when the broker tries for a better price (for a limited order), the speed and the likelihood of execution diminishes. However, the market itself, not the broker, may be the culprit of an order not being executed at the quoted price, especially in fast-moving markets.

 

It is somewhat of a high-wire act that brokers walk in trying to execute trades in the best interest of their clients and their own. But as we will learn, the SEC has put measures to tilt the scale toward the client's best interests.

 

The SEC has taken steps to ensure that investors get the best execution, with rules forcing brokers to report the quality of performances on a stock-by-stock basis, including how market orders are executed and the execution price compared to the public quote's effective spreads. In addition, when a broker, while completing an order from an investor using a limit order, provides the execution at a better price than the public quotes, that broker must report the details of these better prices.1 With these rules in place, it is much easier to determine which brokers get the best prices and use them only as a marketing pitch.

 

The SEC requires brokers/dealers to notify their customers if their orders are not routed for best execution.1 Typically, this disclosure is on the trade confirmation slip you receive after placing your order. Unfortunately, this disclaimer almost always goes unnoticed.

3.5. Execution and Dark Pools

 

Dark pools are private exchanges or forums designed to help institutional investors execute their large orders by not disclosing their quantity. Because institutions primarily use dark pools, it is often easier to find liquidity to execute a block trade at a better price than performed on a public exchange, such as the Nasdaq or New York Stock Exchange. Suppose an institutional trader places a sizable order on a public sale. In that case, it is visible in the order book, and other investors may discover that there is a large buy or sell order getting executed, which could lower the stock price.

 

Most dark pools also offer execution at the mid-point of the bid and ask price, which helps brokers achieve the best possible performance for their customers. For example, if a stock’s bid price was $100 and the asking price was $101, a market order could get executed at $100.50 if a seller was in the dark pool. Main Street is generally skeptical of dark pools due to their lack of transparency and access to retail investors.

 

3.6. Example of Execution

 

Suppose Olga enters an order to sell 500 shares of stock ABC for $25. Her broker is obligated to find the best possible execution price for the stock. He investigates the stock's prices across markets and finds that he can get a $25.50 for the store internally versus the $25.25 price at which it is trading in the markets. The broker executes the order internally and nets $125 for Olga.

 

4. Placement of insurance


Placement of insurance means the initial purchase of an insurance product or renewal unless the insurer independently generates and processes the renewal without the agent's participation or involvement. "Placement of insurance" does not mean the servicing or modification of an existing contract that does not involve the public entity evaluating options for purchasing or renewing an insurance product.

 

5. Controlled Disbursement

 

5.1. What Is a Controlled Disbursement?

 

Controlled disbursement is a standard cash management technique that helps companies monitor and structure payments while benefiting as much as possible from earned interest. Controlled disbursement regulates checks flow through the banking system daily, usually by mandating once-daily statements (typically early in the day). This is done to meet specific investment or fund management objectives.

 

Controlled disbursement is generally employed to maximize an institution's available cash for investment or debt payments. This allows for excess funds to be invested in the money market for as long as possible. This technique can be compared with delayed disbursement, which aims to leave money in accounts for as long as possible.

 

KEY TAKEAWAYS

 

  • Controlled disbursement is a cash management service that is only available to companies.

  • It allows a bank's corporate clients to see their expenditures—or disbursements—daily for a controlled period.

  • Controlled disbursement is used to regulate the flow of checks through the banking system daily, usually by mandating once-daily distributions of checks.

 

5.2. statements led Disbursement Explained

 

Controlled disbursement is a cash management service that is only available to companies. The name comes from its function: it allows a bank's corporate clients to see their expenditures or disbursements daily for a controlled period.

 

Controlled disbursement enables corporations to review and consider pending distributions in their company bank accounts each day. This, in turn, allows the companies to maximize the cash flow for investments and debt payments. It also gives them the ability to choose costs and funding based on which assets have the highest potential for earning interest.

 

Higher interest-earning assets can be left for a more extended period to continue generating profits. Lower interest-earning assets can be used for immediate or short-term payment needs. Corporations tend to prefer controlled disbursement because of its advantages in terms of interest earned, and there are two ways that it benefits goods made.

 

First, to maximize the potential for earned interest, corporations will typically stash their assets into high-interest earning accounts until they are needed later for the disbursement of payments. This technique helps companies make a high amount of interest in their accounts due to their assets.

 

The second technique for earning interest from controlled disbursement comes from benefiting from the float time of a financial payment transaction. Float time refers to the period that exists between when a payment is first made and when the amount is cleared.

 

5.3. Example of a Controlled Disbursement

 

For example, if a company writes a check to pay for goods and services, it will take a few days to be cleared. This delay can benefit the account holder, as interest is earned while the funds sit in an account, waiting to be transferred.

 

Individuals may not get much from this as they may only have a small amount in their account to earn interest. But for a multi-national corporation, the advantage is huge, with substantial amounts of money accumulating significant interest, even for a day or two.