This report has been prepared for the purpose of assessing the borrowing ability of our client Armour Shield Company which lodged an application for a loan. We conducted a through analysis that included qualitative as well as quantitative to assess the financial situation of Armour Shield Company from the perspective of borrowing and repayment. Following this thorough analysis and detailed investigation, it is recommended that Armour Shield be granted the required loan with the corresponding terms and conditions.
Lending Report for Amour Shield ECN09101 Financial Services Decision-Making and Planning II Edinburgh Napier University Table of Contents
INTRODUCTION The liberalization of the financial sector requires a new technology to adapt to the rising pressures on the profitability of banks and financial institutions. Analyzing lending strategies, credit appraisal, risk analysis and lending decisions, while considering the broad framework of corporate banking strategy, it is important that lending be no longer an activity restricted to the assets side of the balance sheet. It must emanate from and fit smoothly into the overall corporate objective of a lending organization and, in the process; it must integrate the expanding range of activities into the lending business Following our review to the companies act from 1985 to 2009, and to the article of association and memorandum of association of Amour Shield, we found that borrowing is permitted to the client and it is in accordance with UK government and directives. Our investigation included checks to Amour Shield two directors: Nick Wilson and Sheila Dow, and as nothing negative came to our attention from their past commercial activities, it is safe to claim that the directors' integrity is totally satisfactory. Included in our through investigation are tests to check whether Nick Wilson and Sheila Dow have the savoir-faire necessary to run the business, and in particular the imminent expansion. We found that prior to forming the company, Nick Wilson was in sales and marketing with a large international textile manufacturer while Sheila Dow is a textile engineer with relevant 3-D CAD experience. This implied that both persons have the expertise to run the business efficiently. The capital contribution by the owners is sufficient for the current financial situation of Amour Shield. In addition, for the proposed expansion, the owners will contribute 25% of the total outlay. This implies the faith the owners put into the proposed expansion on which the lending decision is concerned. The purpose of the borrowing is that while the company has been operating profitably with its current range of products, a growing number of customers have been enquiring about customized products for outdoors sports activities and the two directors wish to exploit this potential and expand the operational capacity.
Borrowing power and lending directives Following our review to the companies act from 1985 to 2009, and to the article of association and memorandum of association of Amour Shield, we found that borrowing is permitted to the client and it is in accordance with UK government and directives.
Director's integrity Our investigation included checks to Amour Shield two directors: Nick Wilson and Sheila Dow, and as nothing negative came to our attention from their past commercial activities, it is safe to claim that the directors' integrity is totally satisfactory.
Project viability The following calculations are prepared for the purpose of assessing the project viability and it includes the following parts:
Depreciation and capital allowances
Capital Allowances 0 200 000 50 000 1 150 000 37 500 2 112 500 28 125 3 84 375 21 094 4 63 281 15 820 5 47 461 11 865 6 35 596 8 899 7 26 697 6 674 8 20 023 5 006 9 15 017 3 754 10 20 000 4983
The impact of the inflation is reflected on the revenues as well as on the direct and indirect cost of sales. It is also incorporated in the project appraisal calculation as it has direct impact on time value of money. Pure inflation is expected to be 3% per annum and all trading cash flows are forecast to increase at that rate with the exception of sales which is expected to rise by 4% per annum and manufacturing costs will rise by 5%.
Working capital With the current commercial circumstances and the proposed project, it is expected that overdraft facilities would be needed to cover initial working capital requirements.
Net trading/operating cash inflows The following table includes the calculations of Net Present Value for the proposed project:
INTERPRETATION The interpretation of the calculations is on two sections: net present value and purchase or leasing option:
Net Present Value Armour Shield financial situation permits to provide the 25% of funds for the expansion project. Concerning the 75% of funds they apply to get loan for, which is £150 000, the NPV calculations show that the project realizes positive net present value of £16 018. However, by checking the sensitivity scenarios for the project, it is noticed that the project is highly sensitive to the direct labour and materials prices as both represent 50% of the total units' value.
Purchase or Leasing Comparison By comparing the alternative to the purchase of machine, which is to lease it, it is found that this alternative is not worthwhile as it produces negative net present value of £218 128. This is despite the tax relief of 30% of the rent annual payment amount of £47 500.
Security A very common form of security taken against business borrowing is heritable security, despite the fact that it may be time-consuming and costly to investigate title and complete formalities.
Floating Charges A floating charge is a charge over all the assets of the company, except of course those that are subject to a pre-existing fixed charge as mentioned above. With a floating charge, the company is permitted to use the assets and dispose of/replace them, so the subjects of the charge are continually changing.
Guarantees Guarantees are a form of third-party security and are particularly common. The main concern over this form of security is that guarantors don't really expect to have to pay out, and long and costly legal battles can ensue. Our investigation of Armour Shield indicates that suitable guarantees are available which supports their loan application.
Repayment The conditions of the advance concerning repayment and interest need to be clearly established at an early stage. Repayment arrangements should be based on fair reflections of profit and cash flows because bankers look to future earnings to provide the source of repayment, not the realisation of security. The profit projection and cash flow forecast will therefore also be used to determine the amount and frequency of repayment.
CONCLUSION Lending is very much to the future so statements or calculations which address the future would appear to make better evidence for decision-making. But historic information may be used to discern trends which can be projected into the future. And, unless anything contrary is known, we would assume that a company which has always been profitable, efficient and liquid would continue to be profitable, efficient and liquid. The problem with future evidence is, however, its reliability because the future is uncertain. Lenders will, therefore, aim to ensure that any estimating is based on careful consideration of the likely outcomes. However, Armour Shield financial position permits for applying and obtaining the loan they required for the expansion project they seek.
RECOMMENDATIONS In light of the abovementioned information, calculations and analysis, it is recommended that Armour Shield be granted the loan they asked for on the terms and conditions agreed.