Case Review On Loan Request Of Envy Ride Incorporation

Jacob Hessel, talented, amiable and charismatic and enthusiastic in motor rides, bought Milson Motors Sports, an exciting recreational motorsport dealership in August 2007 and changed the business name to Envy Incorporation. Though none of the banks provided loan because of insufficient initial capital, Hessel got enough loan from his family and friends who trusted on his ability. Hessels business grew exceptionally in its early months, sales were increasing and the staff complement had grown from 6 to more than 20 employees in less than a year. It was due to his marketing ability and successful business strategies that the company had achieved fast growth with substantial profit. However, due to the economic downturn during 2008, the recreational motor sport industry was significantly affected reducing the sales. This recreational market was further subjected to seasonal fluctuations deterring consumers from purchasing these goods during winter. Hessel believed it was time to expand and restructure the financial side of his business for future sustainability. So, he made a loan request to Genesis Bank of Canada (GBC) comprising of $60,000 as long term loan for the renovation and equipment to incorporate a tattoo parlor within the dealerships, and $450000 as working capital loan for day to day operation and to offset outstanding debts. If this loan is approved, it would be the Envy Rides first bank loan. In order to arrive at the decision as to whether or not the loan should be granted by GBC, financial statements need to be thoroughly analyzed for determining the stability and credit worthiness of the company. The income statement shows increase in net income over the last year which has reached to $177894. However, cash flow statement shows the negative cash flows of $147,647. This is due to the huge amount of cash outflow in financing activities, purchase of inventory and increasing operating cost of the business. As we analyze the liquidity ratios of the company, working capital seems to be declining. Current ratio of the company is 1.12 :1 which is below the standard of 2:1 and quick ratio which is 0.09:1 is far below the acceptable standard of 1:1. This implies companys current asset is not sufficient to cover up its current liability. While analyzing the solvency position of the company, its debt equity ratio is 6.5:1, indicating the companys dependence on debt to be higher than on equity. Since there is already a huge amount of debt financing, further addition of debt, though in the form of bank loan may not be a

good idea. The efficiency ratios show positive aspects as the receivable period is much lower compared to payable period indicating non interest source of credit through accrued payables. The financial statement analysis indicates that the companys solvency position isnt too bad, but the operating profit has significantly declined due to reduction in sales. Also, its liquidity position seems to be weak for providing working capital loan. Though long term solvency ratios are positive, its not a good idea to expand a business at time when whole economy is facing a downturn with no guarantee of the recovery of economic condition. Expansion at the time may further lead to higher loss in operation. So, Id suggest the bank to reject the loan request at this moment.