At this point it would be very difficult to approve a loan of $100,000 to Ajax Electronics. Borrowing money to meet cash flow needs demonstrates that cash generated from operating activities is not generating sufficient working capital.
There are several issues affecting this company¶s cash flow that need to be addressed immediately. There are several suggestions that can be made to Mr. Roberts to begin improving his company¶s cash flow situation and lower risk.
Shorten Account Receivable Turnover ± this company is taking way too long to collect on
outstanding receivables. The company currently has $23,000 in receivables already exceeding the industry average for collection. They should put more effort into collecting on old receivables and possibly changing their credit policy to a net 30. This would provide an immediate influx of cash needed.
Shorten the production cycle ± currently Mr. Roberts has to ...view middle of the document...
Accounts payable arrangements ± contact all your accounts payables and try to set up a payment arrangement. While this will not put immediate cash in hand, it could open the door for better terms without possibly being cut off by suppliers. Some companies may even offer you a discount for paying within a given time period. This also includes working out a deal with the IRS to make payments on the current tax debt. The government could force the company to close its doors and seize assets to pay the tax deb as a worst case scenario. The IRS has already threatened to put a lien on the company and change it to a ³pay as you earn´ account which could devastate monthly cash flow. Contact them and explain the company is restructuring and would like to set up payment terms that would benefit both parties.
Avoid over drafts on banking and credit accounts. Over drafting on an account could severely damage credit reports making it more difficult to obtain better terms through refinancing.
Consider taking out a personal second mortgage or an equity line of credit on real estate owned.
In 2002 mortgage rates are extremely low and real estate appraisals are very high. Be very
careful with the amount you take out and be wary of any adjustable rate loans. Always calculate the worst case scenario when borrowing money for a mortgage. Used the highest possible rates under the loan you are taking to ensure that you can make those payments should the actual loan rates reach those values. Subprime mortgage lenders may be able to provide reasonable terms for a personal mortgage compared to the higher rates of commercial loans. This should only be used as a last resort because it puts the individual at more risk.
If these changes are implemented, chances are that Ajax Electronics would not require an additional commercial loan to supplement working capital. Cash flow could be increased by simply collecting on account receivables in a more timely fashion, improving the manufacturing process, better managing inventory, and properly coordinating payments of accounts payables. The decision at this point would be to not extend the loan to Ajax Electronics until they can show improved cash flow.