The Problem of Approving a Loan Extension

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Table of Contents

Introduction
Discussion
Conclusion
Reference

Introduction

The proposed scenario discusses the problem of approving a loan extension for Industrial Fasteners at Manila First Bank, without which, according to Erickson Santos, president of that company, the organization could face serious financial problems. One of the critical barriers to approving the loan extension is the unfavorable picture of the cash flow statement, which was “dismal” for the year.

Discussion

As such, Santos is proposing to consider selling or factoring the company’s accounts receivable, which should positively change the cash flow statement. Such a solution would allow Industrial Fasteners to get paid immediately, which would show up appropriately on the report as profit and increase the chances of approval for a loan extension. However, it is essential to understand that factoring often occurs at a reduced rate, so overall, such actions could prove disastrous for the business. In other words, the practical value of factoring (or selling) receivables has advantages in the short term and will not only get you money but also potential lender approval, but in the long term, it can lead to a drop in benefits due to a discounted sale.

There are additional alternatives that Industrial Fasteners can take advantage of to maximize profits. First, is to renegotiate the terms of the loan, namely extending the deadline for submitting cash flow reports or creating more favorable terms. This option could be less painful for the company since no sale of receivables would be required, while Industrial Fasteners would have additional time to improve the report. The value of such an offer is the focus on long-term benefits, as well as maintaining a loyal and trusting relationship with the bank. However, this alternative would only work if Manila First Bank is loyal enough to the company to offer a delay for a decision. At the same time, it is unlikely that such a deferral would entail the introduction of additional fees, so the benefit may not be significant or may not exist at all. A third option for generating new funds that positively affects the report is to reduce costs, whether operating expenses or payroll costs. In the short term, this solution proves attractive because the company is not losing money, improving earnings, and getting approval from the bank.

Conclusion

However, the value of the proposal, overall, is again questionable, as cost-cutting negatively affects operational efficiency, program funding, and employee productivity (Nguyen Trong & Nguyen, 2021). Thus, it is essential for Industrial Fasteners to have alternatives consider the consequences, and calculate the risks in both the short and long term when making decisions.

Reference

Nguyen Trong, N., & Nguyen, C. T. (2021). Firm performance: the moderation impact of debt and dividend policies on overinvestment. Journal of Asian Business and Economic Studies, 28(1), 47-63. Web.

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The Problem of Approving a Loan Extension

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