Be Our Guest Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Renewal of the company’s credit line

Bank is concerned about the principal and interest payment and the bank will only renew the company’s credit line if the company had made timely payments of principal and interest. Further, the bank also reviews the future perspective of the company as well and considers whether the company will be able to generate sufficient revenues, which will contribute towards the bank’s payments.

Although, the company has complied with different covenants but it does not comply with all the covenants, which will discourage them and the bank may restrict from granting the credit line but on the other hand, the company already has a tremendous track record and there are more chances that the company’s revenue may increase by 10-15% for the next quarter, which will impress the bank and will increase the possibility of renewing the credit line.

The company has fully used the credit line in 1997 which may raises doubts for the bank that the company may not have sufficient funds to finance its working capital. Further, the company also reports an overdraft of $3,498, which will represent a bad impression and increase the possibility that the bank may not renew the credit line in the next period or there may also be a possibility that the bank may charge more interest rate for bearing increased risk in the company.

Our analysis in Appendices 1 shows that the interest coverage ratio of the company has been decreased from 6.04 times in 1994 to 3.34 times in 1997, which may be a cause for concern for the bank because if the ratio continuous to decline then it will raise doubts on the company’s ability to pay-off its interest and principal payment, which will increase the possibility that the company may not renew its debt facility or may renew this at an increased interest rate.

Company’s revenue depends on two major customers from which the company generates around 21% of its total revenue, which may be a concern for the bank because if the customer fails to provide business to the company then it will substantially threaten the revenues and increase the possibility that the company will be unable to repay principal or interest payment.

Although, the company has also some positive points as well, which contributed towards maintaining the customer relations and increase the revenue of the company i.e; the company has excellent delivery and operating facilities and are organized with speed and accuracy, which impressed the customers and contributed towards the growth of the organization. Further, it enabled the company to report annual revenue from $1 million in 1991 to $2.7 million in 1997, so it clearly indicates that there are strong growth perspectives in the company and there is a strong possibility that the bank willrenew the company’s credit line for the next period.

Analysis of shifting from short term borrowing to permanent financing

The company would only use permanent financing for items where the company believes that the funds will be stuck throughout the years. The company shall not use current borrowings to finance fixed assets because if the company does so then it will raises liquidity issues for the company and the company will be facing difficulty in managing its working capital. Further, interest rate charged on long term borrowings is comparatively low then short-term borrowings and would be less susceptible to continuous fluctuate.

Further, if the company uses overdraft facility to finance its working capital then it will require substantial outflow of resources because interest rate charged on overdraft facility is comparatively higher then interest rate charged on long term borrowings and the overdraft facility is increasingly risky because its repayment is on the demand by the bank.

Revision of the covenants

The bank does not only exert strong covenants on the company but has also attained all the assets of the company as a collateral for granting the loan, this seems unreasonable because the company is not a start-up company and it has been running its operations since 1983. In addition, the company had already reported tremendous success over the last few years due to its experienced management and due to the enhanced customer care and the company is not susceptible to increased risk, so the organization shall consider to discuss this provision with bank and if possible it should consider to revise the pledged covenant................................

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