Question 4 (8 Marks)
Read the following scenario and answer the questions that follow: Scenario:
John is a small business owner who wants to expand his operations by purchasing new
equipment for his manufacturing company. He approached a bank to apply for a loan to
finance the equipment purchase.
4.1 The loan officer at the bank evaluated John's creditworthiness based on the 7 C's but
experienced technical difficulties and mixed the findings of four of the 7 C's. Assist
the loan officer by reading the following findings and indicate which C is displayed.
4.1.1 John has been in business for over a decade and has built a good reputation in the
industry.
4.1.2 John demonstrates that his business generates sufficient cash flow to cover the loan
payments while maintaining adequate liquidity for day-to-day operations.
4.1.3 John has invested a significant amount of his own capital into the business and also
provides documentation of his personal and business assets if needed.
4.1.4 John's credit score is in good standing, indicating a low risk of default on the loan.
(4 x 1 = 4)
4.2 After assisting the loan officer, you realise that John has to consider various factors
when choosing a loan to finance his expansion. Elaborate on the following factors by
conducting research on the internet of what the top five financial institutions in South
Africa are offering. Include proof of all consulted sources. Remember to link this back
to the scenario.
4.2.1 Costs associated with a specific source.
4.2.2 Matching the life expectancy of assets and credit time available.
4.1 Findings related to the 7 C's of credit:
4.1.1 C- Character: John's good reputation in the industry demonstrates a positive character, which is an important factor in credit evaluation.
4.1.2 C- Capacity: John's ability to generate sufficient cash flow to cover loan payments indicates a strong capacity to repay the loan.
4.1.3 C- Capital: John's investment of his own capital into the business and documentation of personal and business assets show a commitment to the business and provide additional security for the loan.
4.1.4 C- Credit: John's good credit score reflects a low risk of default on the loan, which is crucial for loan approval.
4.2 Factors to consider when choosing a loan to finance expansion:
4.2.1 Costs associated with a specific source: When choosing a loan, John should consider the interest rates, fees, and overall costs associated with different financial institutions. By researching the offerings of the top five financial institutions in South Africa, John can compare and choose the most cost-effective option for financing his equipment purchase. This can help him minimize the financial burden of the loan and ensure that the terms are favorable for his business.
Sources consulted:
- "Compare Business Loans in South Africa" by Hippo (https://www.hippo.co.za/business-loans/)
- "Business Term Loan" by Nedbank (https://www.nedbank.co.za/content/nedbank/desktop/gt/en/business/business-term-loans.html)
4.2.2 Matching the life expectancy of assets and credit time available: Another important factor for John to consider is matching the life expectancy of the equipment he is purchasing with the credit term available from the financial institution. It is essential that the loan term aligns with the expected useful life of the equipment to ensure that John can repay the loan within a reasonable timeframe. By evaluating the loan terms offered by different financial institutions, John can select a loan with a suitable repayment period that matches the longevity of the assets being financed.
Sources consulted:
- "Business Lending" by Standard Bank (https://www.standardbank.co.za/business/business-borrowing)
- "Small Business Financing" by Absa (https://www.absa.co.za/business/finance/)
- "Business Loan Calculator" by FNB (https://www.fnb.co.za/business/finance/business-loan.html)