BFF3841 Sample Test.
SOLUTIONS
You are working for the regional office of a community bank near Monash Town. Monash Community
Bank has always prided itself on its ability to deal with local matters in a timely and efficient manner.
Your latest loan request involves BW’s Grill. BW’s Grill is a long-established part of Monash Town
and the sponsors of the local football and netball teams. While BW’s has been in operation for over 20
years it has been a customer of Monash Community Bank for the past five years. When the new owners,
George and Emily, took over BW’s five years ago they elected to keep the established name and
community relationships. Some recent changes to the safety standards mean that BW’s no longer meets
the safety code for its electrical wiring. George and Emily have been given 180 days to fix the problem.
The process of looking at the premises has made George and Emily realise that the Grill premises are
in need of a tidy up and update and they have decided that this is a good time for a renovation. BW’s
Grill will need to be closed during the electrical repairs and renovation.
George and Emily have presented to you an itemised list of the cost of the renovation and repairs, with
the supporting quotes from the relevant tradesmen and suppliers. They have also provided an up to date
balance sheet and profit and loss summary. They are asking that the bank lend to them the full cost of
the renovation and repair.
Required:
Critically evaluate the above loan request and recommend whether you would lend the requested
amount.
Facts of the Case:
10 marks
Must include Customers name and director’s name if known.
The amount being borrowed
The exact purpose of the loan.
An established customer is seeking to borrow the full cost of their renovation of their established
small café / grill.
This customer is the sort that any retail / small business bank likes and is a good fit for Monash
Community Bank.
Concerns:
40 marks
5 key ratios (5 marks)
The first consideration in ALL commercial case studies is to consider the five key financial
ratios namely
Sales
Gross Margin
Net Margin
Interest Cover
Gearing
Commentary on major variances or trends within these ratios is expected including the
reason why a ratio has moved. If nothing is apparent then a simple statement that a reason
is not apparent is fine. We don’t want students making reasons up however logical common
sense is expected e.g. the 70% major customer causes sales growth.
The loan request will result in BW’s having a substantial increase in debt and the debt repayment plan
has not been well articulated.
5 marks
This is a cash business with decent liquidity, but gearing has been increasing over the past few years.
Retained profits have been declining as have margins. (Sales have fallen but costs are increasing).
5 marks
Despite still good profits George and Emily are not paying down their mortgage especially in 2023.
5 marks
The forecasts imply that once the renovation is completed sales and profit margins will increase.
The loan request assumes that all aspects of the renovation will come in on time and on-budget. This
seems unlikely.
10 marks
The Grill is operated as leasehold, and thus the premises are not available as security in case of
default. The fixed assets that will be financed by the loan will have limited market value if there is a
default on the loan. Many of the fixed assets will in fact become property of the leaseholder after the
renovation and George and Emily do not own the premises, but need to do the work to keep their
business open.
10 marks
The Grill is making nice profits but retentions are not increasing.
5 marks
The bank is being asked to provide 100% finance
10 marks, needed for full marks, otherwise maximum of 30 out of 40.
Decision:
50 marks
Approve the loan subject to George and Emily providing security is increased
5 marks
Request a statement of their personal financial position: do they have other assets that can be used as
security (e.g. House, shares, term deposits etc)?
5 marks
The bank will not fund 100% of the renovations and George and Emily need to make a solid
contribution.
10 marks, need for full marks otherwise 40 out of 50
Given that the profits are not being reflected in retentions G&E need to attend to this.
10 marks
Request director’s guarantees from both George and Emily as well as Keyman insurance.
5 marks
The loan request assumes that all components of the renovations will come in on time and on budget.
5 marks
A contingency reserve from George and Emily would be prudent.
5 marks
A temporary increase in the overdraft limit of 20% ($31,000) would be prudent.
5 marks
Request copies of all the tradesmen’s quotes and contracts.
5 marks
Require a business plan that has a loan repayment plan and a plan to pay down the overdraft if the
renovation goes over budget.
5 marks
The declining margins need further explanation, this should be part of the business plan.\
5 marks
A statement of cash flows would be worthwhile to see what is happening to the profits not being
retained in the Grill. I suspect G&E are taking cash out of the business and should have sufficient
assets to provide an equity injection.
5 marks
As the borrowing is for construction project do not advance the whole sum up front but provide
payments based on completion certificates or evidence of completion.
10 marks. needed for full marks otherwise max of 30 out of 40
As George and Emily are renting the Grill ask for a locked in rental agreement of at least three years,
so the landlord does not evict them soon after the renovations.
5 marks.