VENDORS PAY FOR THE PRICE OF BAD LOANS
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The saying "All that glitters is not Gold" pretty much sums up the theme and the implications of this article. The rundown of the article is mainly to show the immeasurable importance of financial analyst and specialist to the so called "global tech giants" and the consequences in their lack thereof.
To start with Telecom start-ups and dot-com companies were given loans without proper evaluation that is in terms of credit and earnings history. The loans however were based on the anticipation of huge future earnings by the start-ups a term that banks and credit unions will no even put into consideration. According to the article, loan losses in excess of reserves are charged to current earnings, high rates of default have substantial and immediate impact on the vendors financial performance, for instance Lucent technologies used 41% of its 2000 earnings to finance start-ups and dot-coms and by the year 2002, they laid off at least half off their staff to cut cost. Nonetheless, the impact and the method of making up loans vary from vendor to vendor.
Most companies lack financial and loan workout specialist and so therefore loans are issued the sales force which leads to their inability to draft up good loan contracts inevitably leading to the recovering of a small percentage of the loan when they go bad, repossessing the unpaid for equipments barely offsets the debts because it has depreciated greatly in value and most times they are either damaged or have to be auctioned off. Vendors have a lack of awareness of the best lending practices and pressures to avoid them as we all know business proposals can be very lucrative without thorough appraisal. A proper risk budget would require companies to maintain reserves for expected losses based on the probability of default and the expected magnitude of those losses given default and to hold capital to withstand unexpected losses that exceed those reserves. Regrettable, few companies have done this, hence the relevance of qualified financial analysts in techie companies...