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Commercial Equipment Financing - Case Study Example

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Commercial Equipment Financing

Problem Statement Commercial Equipment Financing (CEF) is issuing loans to trucking companies that operate in a very volatile industry, hence increasing the chances of bad debts. This calls for very careful and prudent credit policies, to avoid losses when clients become bankrupt. Problems/Sub-problems/Issues The following are the minimum requirements that had to be met before CEF would approve any loan request: i. Any company that has operated for less than three years does not qualify for loan ii. For any company to be considered for loan, it must be able to generate adequate cash flows to repay the monthly interest. iii. Any company with debt/equity ratio, which is greater than 4:1 does not qualify for loan iv. The company that is being awarded some loan must be ready to finance 10 percent of the asset’s cost on its own v. Other considerations include the general economic conditions, the character of the business owner, and any asset of the company that is pledged as collateral. Challenges experienced by CEF, which increases the risk of bad debts The status of the transportation industry in southern Ontario The industry operated profitably from 1985 to 1988, but a considerable recession that hit the economy in 1989 caused instability. As a result, the trucking companies lost revenues as manufacturers were reducing their transportation requirements as they cut down their operations. In fact, most of the trucking companies became bankrupt and the few that survived the situation lowered their prices to remain competitive. Although the industry recovered from the recession in 1990s, the transportation industry in southern Ontario remained challenging as there were too many companies competing for few clients. By 2003, albeit the industry experiencing substantial growth, the profit margins remained very low since the prices were still very low. To survive with very low prices, the companies are forced to look for loans so they can operate at high volumes to increase their profits. Besides, the trucking companies maximize the time they spend on the road to increase sales so they can be able to repay the loans and their operating expenses. New legislation The Ministry of Transportation of Ontario (MTO) had introduced legislation that required all vehicles used by trucking companies to comply with strict safety standards. The ministry impounded any vehicle that failed to comply with these safety measures. Analysis 4 C’s of Credit Commercial Equipment Financing (CEF) carefully analyses its borrowers before approving loans, with the aim of increasing the recovery rate. This is particularly very important because the industry is undergoing very tough economic conditions and the chance of a company failing to repay the loan is very high. What CEF looks for can be summarized in terms of ‘4 C’s of Credit’ as analyzed below. 1. Character The financial History of the borrower is referred to as the character. It is in most cases identified by looking at the credit history of the borrower especially as pointed out in the credit score. Factors that affect the credit score of a borrower include delinquent accounts, late payments, total debt, and available credit. To attain high scores, the borrower should have very few problems. CEF fixes 4:1 debt/equity as the maximum for any company that can qualify for a loan – this is a very effective way of determining the character of the borrower. Furthermore, a company with too much debt ...Show more

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Author: Instructor: Date: Executive summary Commercial Equipment Financing (CEF) is a division under GE Capital Canada, which issues loans to trucking companies. Its loan recovery strategy is very tight, and only one percent of its portfolio has been lost to bad debts…
Author : rbergstrom
Commercial Equipment Financing essay example
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