Page 29 - CIMA SCS Workbook August 2018 - Day 2 Suggested Solutions

CIMA AUGUST 2018 – STRATEGIC CASE STUDY

Business prospects of the potential borrower

An analysis of the business plan will give the lender an initial insight into the business prospects of
the borrower. However, it will be important for the lender to carry out further analysis in an
attempt to build up an independent assessment of the borrower’s prospects. For example, the
lender will assess:

• the quality and track record of the borrower's management
• the risk profile of the company
• the prospects for the industry sector – e.g. competitor growth, market share trends etc.

Security available

The lender will look at the borrower’s statement of financial position to assess whether there are
assets that could be used to provide security. Lending the money secured on assets would
significantly reduce the lender’s risk.

Credit rating

The credit rating is also an important factor. A company with a poor credit rating will find it more
difficult to borrow money. If the lender does decide to lend, a higher interest rate would be
charged to compensate for the risk taken on by the lender.

Other borrowings and covenants

The risk to the lender will be higher if the borrower is already highly geared and has debt
covenants attached to its existing borrowings.

Application to FNG

Business plan

If we decide to apply for some new debt finance, it will be really important to present a good
quality business plan to the lender. If we don’t have the expertise in the Finance Department to
prepare this, we could employ a Corporate Finance firm to help.

In the business plan, we’ll have to acknowledge the fact that our profitability has been in decline,
in common with many other firms in our industry. However, the lenders will be more interested in
future plans than past performance, so it will be critical to incorporate the impact of any planned
investments and strategies. For example, if we have any plans to invest in the digital side of the
business to improve profitability and cash flows, a detailed analysis of the likely impact of these
investments will be vital.

Any investments in new non-current assets would also increase the amount of assets FNG has to
offer as security. This could be viewed very positively by the lenders.

Interest cover and credit rating

Our interest cover has reduced from 4.0 times to 1.9 times in the last couple of years, so this will
be a concern for the lenders. We will need to explain what plans we have to stabilise our
profitability to prevent this falling any further.

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