What determines a company's viability for a loan

Ace Company

Executive summary

This research is to depict the relationship between the organization's lending loan and the financial performance of Ace Company. The study uses Ace Company as their case study approach using their qualitative and quantitative data. The Ace organization has been on the market for some time and has a good reputation in its business. Therefore, they have earned themselves a vital credit appraisal, giving them a more competitive advantage in the field. This made the organization lending loan to Ace Company conclude that credit appraisal of Ace could survive the market pressure and be profitable. Therefore, it recommends continuously assessing Ace Company's risk management to determine if they are more competent to deserve the loan they request. Thus, this research has concluded that the credit risk management of Ace Company is directly proportional to the performance of the loaning organization.

Introduction

Many firms take loans to influence the demand for their products. The Ace organization wants to request a $3 million loan, repayable in 10 years, to purchase production equipment and develop accompanying software. However, based on lending, organizations allow firms to benefit from their loans if the added cost of the receivable is less than the profitability generated due to the organization's increased sales (Marshall et al., 2020). Therefore, when lending organizations can identify potential loan defaults, it will save them a great deal since that will lead to decreased cash flow and low liquidity and, thus, financial distress to the firm requesting the loan. On the other side, if the borrower organization has a lower credit exposure depicting reduced chances of bad debts, it indicates that they are financially healthy and worth the loan. Business dynamics are evolving, and the lending organization needs to be more cautious to understand risk management and cash flow increase. Therefore, the lending organization needs to be more careful not to find themselves in credit risks, including lost principal and interest and increased collection costs. Credit risk is when the lender is on a higher stake of incurring a loss from a borrower's failure to repay their loan or meet their contractual obligations (BROCK & EICHLER, 2022). Thus, credit risk management enables lending organizations to understand their exposure to Ace Company contracts. Therefore, it is essential to assess the Ace organization's risk and be equipped with strategies to determine if they are worth being credited the amount of loan they are requesting.

The financial performance of Ace Company.

Credit risk appraisal is the process through which the leader asseses the borrower's creditworthiness to determine if they are worth the loan they request. It should be comprehensive to minimize the risk of exposure to the lender. It should consider factors like the applicant's income, several dependents, monthly or yearly expenditure, and repayment capacity, among other factors (Avakumovic & Avakumovic, 2016). Thus the management of the lending organization should apply risk control techniques to ensure they are issuing Ace organization credit that is within their capabilities to pay on time.

Account receivable collections

Account receivable is the number of funds the organization anticipates gaining from the customers regarding their debt responsibilities. After analyzing Ace Company's financial performance for their previous years, it depicted that the appendixes customers are trending upwards, implying that they are paying more yearly finances towards their debts. This is a positive trend for the organization since when they receive more cash flow; it increases their chances that they will be able to manage to pay off any debts they incur. (Catherine, 2020) Furthermore, we shall consider the cash and short-term investments and receivables for Ace Company to determine if they are in a position to keep up with the current charges and any future charges that they are trying to obtain.

Their 2017 report indicated the total cash received by the organization was $2,547, and the total accounts receivable was $ 4000, which, when summed, totals $ 6,547 (University, 2022). Analyzing the total amount of income indicates that the organization is receiving a rising trend. At the same time, the duration customers have taken to repay their debts is decreasing, thus showing that the organization is beginning to see a positive increase. When this data is compared with 2016, it depicted that customers' average duration to repay their debts fully was 77.99 days, which had decreased significantly in 2017 to 72.13 days. Thus, this gives Ace Company the advantage of being credited with the loan they are requesting since the decrease in the duration for repaying debts indicates that the organization has a higher probability of receiving cash flow sooner. Therefore, if they manage to keep that trend, they can be confident enough in their debt collection from their customers.

Inventory turnover

Inventory turnover is the financial ratio indicating the number of times an organization has sold and purchased inventory within a specified duration. Therefore, the lending organization must look at its inventory turnover ratio to know how many times Ace Company has sold and purchased its inventory. After finding out the ratio, the lending organization will then divide the days within the period of the inventory turnover ratio to determine the days it will take for Ace organization to sell their products. Based on the report, in 2016, Ace organization recorded an inventory turnover of 1.94 times, dropping significantly to 1.82 times in 2017 (University, 2022). However, the average industry turnover rate is ten times over Ace's yearly. This could be a threat as the lending loan organization understands that a low inventory turnover could mean that either company could have a poor cash flow by holding more stock they might need to meet their demand. Or maybe Ace Company is doing minimal marketing.

Besides, when it is viewed from the other end, it could be seen that Ace organization was overstocking due to a rise in item prices since the amount of inventory depicted by the 2016 report was $5000 worth. However, the ending inventory was $ 4800, leaving the lending organization without any conclusion than believing that they never sold as many items as their target was (University, 2022). When the lending company shifted its focus to the 2017 report, it indicated, in the beginning, that the organization's inventory was $6000. Still, towards the end, it had dropped to $5000, suggesting that they were experiencing increased sales.

Recommendation for making a loan decision

The base role of the loan manager for a lending organization is to have an intuitive understanding of the finance of the organization that is requesting a loan, which in this scenario is Ace Company. Understanding how to create and measure value as the team leader will help the organization make smart decisions to grant Ace Company the loan within its capabilities (Gavin, 2019). Therefore, having gone through the financial statement of Ace organization, considering their balance sheet for the two years indicates the organization's financial position at that specific point in time. It outlined all the organization's resources and depicted how they were financed. Also, the manager had to focus on their income statement to value their earnings of that duration and their cash flow statement to determine the cash the organization was generating and using over that period.

This made the management of the lending organization examine the meaning behind the metrics of Ace organization by focusing more on their inventory ratio since it depicts the organization's liquidity, profitability, leverage, and productivity ratios that determine whether they are eligible for the loan they are requesting (Gavin, 2019). This helps in forecasting the future organization's worth of projects and assets to understand how their values might change in the years ahead and know if they will find some difficulty repaying their loan or managing efficiently. Once the management of the lending organization has understood the Ace Company's present value of future cash flow, it is easy to determine if they are worth the endeavor. Therefore, having considered all the matrices of Ace organization, it indicated that they are selling more and their inventory is increasing steadily, which is a positive indication that they can repay their loan over that specified duration. Thus the loan request should be funded.