Question

In: Finance

Please advise the following people what is the best source of financing. Also, explain the strengths...

Please advise the following people what is the best source of financing. Also, explain the strengths and weaknesses of the borrower’s ability to get loan based on 5 C’s of credit:

-Mary has been in the construction business for 3 years. The business has averaged $120,000 in profits each year. She is seeking $250,000 to purchase new equipment. Her credit score is 650. She also has a house valued at $350,000 with outstanding mortgage of $200,000. Mary over 20 years of experience in the business.

-Mark is seeking $10,000 to start his graphic design business. His credit score is 630 and he has no personal assets.

Solutions

Expert Solution

Mary has a successful business track record with average $1,20,000 of annual profits with over 20 years of work experience in the business. Her credit score is 650 and such credit score is considered low.

Mary should go for secured loan from bank with house put as collateral. Getting such loan shouldn’t be difficult given her successful business record, purpose of loan which is buying equipment and house as collateral.

5 Cs of credit /ability to identify credit worthiness of Mary to repay back the loan

  1. Character- Credit history of Mary of repaying loans in past.
    1. Low because of low credit score of 650 which might be due to the fact that Mary must have defaulted in the past on some loan
  2. Capacity- Mary’s ability to repay loan
    1. High because Mary does have house as collateral to sell off in case of default
    2. Purchase of equipment is likely to improve the business capacity/operations and contribute to extra profits and thus repayment shouldn’t be a problem
  3. Capital- Amount contributed by borrower towards investment
    1. Limited information available in the case to comment whether she is contributing any amount from her own pocket towards the business
  4. Collateral- Asset secured with the lender
    1. High because Mary is putting her house as collateral and in case of default in repayment of loan, the bank could sell off the loan to recover loan amount
  5. Conditions- Terms and conditions for loan/investment
    1. High because the loan is not used for specific assets to be used in the business and likely improve the operational performance

Mark has a credit score of 630 and such score below 650 is considered poor. Also he doesn’t have any personal assets to be used as collateral and thus common sources of finance like secured loans from banks, government grants etc. won’t be possible.

Mark should try for borrowings from friends/family. If that’s not possible, Mark should go for working capital loan from a bank. Due to poor credit score and no collateral, bank might charge a high rate of interest.

5 Cs of credit /ability to identify credit worthiness of Mark to repay back the loan

  1. Character- Credit history of Mark of repaying loans in past.
    1. Low because of low credit score of 630 which might be due to the fact that Mark must have defaulted in the past on some other loan
  2. Capacity- Mark’s ability to repay loan
    1. Low because mark does not have any collateral to sell off in case of default.
    2. He is also not a salaried individual and thus not having any fixed monthly income
    3. His capacity to pay depends on success of graphic design business
  3. Capital- Amount contributed by borrower towards investment
    1. Limited information available in the case to comment whether he is contributing any amount from his own pocket towards the business
  4. Collateral- Asset secured with the lender
    1. Low because Mark does not have any personal assets to be put as collateral
  5. Conditions- Terms and conditions for loan/investment
    1. Low because the loan is not used for specific assets like home or car but instead it is being used for starting a business whose success or failure is uncertain


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