The process of borrowing a loan from any bank begins with an expression of interest by the borrower to borrow such funds as he might require. Thereafter, it is the obligation of the lending institution, Community bank in this case, to conduct an objective and fair evaluation of creditworthiness of the borrower. The credit evaluation process is a clearly outlined procedure that varies from one creditor to another and it seeks to ascertain the degree and ability of the borrower to repay the borrowed funds as agreed at the time of borrowing. ("eCFR — Code of Federal Regulations", 2016)
The proposal by Stephanie to request the bank manager alongside his wife is unethical and would amount to a breach of the banking code of ethics on the part of Garcia. The idea of requesting the bank manager to “assist” in getting the loan approved lacks justification in the borrowing process. The wife of the manager is also not a banker and so would have very little or no knowledge of the entire loan borrowing process, the risks and benefits that could arise from borrowing the loan.
According to the code of federal regulations, a creditor shall conduct a creditworthiness evaluation for any potential borrower and ascertain that such a borrower meets the requirements of borrowing such amounts, without any form of discrimination. Stephanie can best help her father by giving her financial analysis for the viability of the loan if approved but the aspect of getting an approval for the loan should be objectively determined by the creditworthiness of her father as may be determined by the lending bank according to the Federal Reserve System regulations. Smith should therefore present himself officially at the bank and declare his intentions to borrow the money. It is then the duty of the bank to evaluate him in a bid to determine if he meets the bank’s standards of creditworthiness for the amount. ("eCFR — Code of Federal Regulations", 2016)
Leverage in business is basically the borrowing of funds in order to increase returns/ profitability. Limited leverage is however good for the business because it gives the business a powerful and viable access to capital as well as a reduced risk that is associated to high leverage. The business can has the privilege of utilizing the funds availed by the leverage efficiently to maximize their returns. The risk factor is also reduced, or else limited as the amount of leverage. The high amounts of paybacks and interest rates associated with unlimited leverage are eliminated if the leverage is limited. (Pate, 2004)
The decision to borrow the loan is financially viable since the investment has a positive net present value of $ 28,681.97. The investment will also have a 16.51% internal rate of return which is a favorable relative measure of the returns that could accrue from the purchase of the lorry. The Investment also has a favorable profitability index which is a justification for the investment undertaking. The lorry also has a payback period of four years which implies an additional four years of profitability.
The investment in the truck is profitable and so Smith should not close his business for lack of cash flow. He can borrow the money and invest it in the purchase of the lorry with confidence for profitability and business continuity. Put in the same situation as Smith, I would proceed to undertake the investment.
References
eCFR — Code of Federal Regulations. (2016). Ecfr.gov. Retrieved 3 May 2016, from http://www.ecfr.gov/cgi-bin/text-idx?SID=0b5acb1297b13b3bac389c61054b9256&mc=true&node=se12.2.202_17&rgn=div8
Pate, R. (2004). Leverage: A key to success and wealth. Rocky Mount, North Carolina: VP Publishing LLC.
