Banks are the substantial part of a company’s operations. Raising funds from banks are very much important for the companies in order to conduct the smooth functioning of its business. Banking basically deals in accepting deposits from individuals or firm and simultaneously lending funds to them (Iyengar, 2009). However, in the process of borrowing and lending banks face risks related to credit risk, interest rate risk and liquidity risk. Apart from this, there are certain issues in practicing this exercises on the end of banks as well as firms or individuals.
This report provides a summary of article and detail analysis of the issues faced by company Athletequip related to their credit requirements with its bank named as Third First State Bank situated in Alhambra. The issue arises when the management personnel of the bank changes and the person who were appointed were not familiar the principals of Athletequip Inc. Furthermore, the report also concentrates on the issues faced while going through the chapters of coursework named BUS308 Credit and lending unit. In the later part the article is been compared and contrast with the issues presented in case and the unit, followed by a conclusion.
Summary of the article
The article was written by Matt Higginson, Frederic Jacques, and Roger Rudisuli who provided seven pillars of wisdom for the collection managers and shops. The article says that there are many felonies faced by collection managers in some markets where they operate. It was mentioned in the article that in earlier times, collection shops or lenders have to face many challenges globally. The low loss rates enables them to reduce the size of their collection operations. This has also led to the reduced criteria for acquisition and offering riskier products to consumers which have less credit history. However, low loss rate resulted in the inadequacy of the tools and staff with lenders to address their at-risk accounts. In virtues of this, the author discussed some new approaches which help all the lenders in making their collection operations effective, eventually leading to generating revenue and minimizing cost (Higginson, Jacques and Rudisuli, 2018).
Out of the seven pillars, one is segmentation which is effective in the times where the capacity of collector is limited. Lenders prioritize their consumer by value at risk by using collection specific models which are increasingly developed. Segmentation helps the lenders to distinguish between the customers which are delinquent who requires human contact and those who will reply or respond to automated messages. Apart from this, value-at-risk segmentation also has many advantages. VAR identifies the behaviour of customers and help the lenders to align their efforts with the need of costumers (Choudhry and Wong, 2013).
Another pillar is skiptracing which required banks to establish this practice complying with all the privacy restrictions that can vary from one geographical dominion to another. Banks can easily access at-risk customers by using specialized skiptracing with the recovering agencies which find out such customers quickly than banks. Contact strategy is the third pillar which means creating contacts with help of emails, texting, calls and posting letters. Many collectors now days use wide range of digital channels and it is been found that it is good when customers can choose the contact channel as well as the time of repayment. Apart from them, other pillars of wisdom described in this article are treatment choices, frontline capabilities, performance management and organization.
In a nutshell, the article describes strategies, technologies and integrated skills required to be used by collection shops to meet and face their new challenges. It points the more effective collection operations where customers are segmented accurately and on value at risk. Collectors contact more consumers on the basis of effective channels of communication which eventually leads to tailored results. However, the approaches discussed requires a trained frontline staff whose performance is timely managed.
Brief and issues of case – Athletequip Company Inc.
Athletequip was a California based company founded in 1964 as a partnership firm and got incorporated in 1974. The company was engaged in designing and manufacturing athletic garments, specifically uniforms and jackets. Half of the company’s inventory consists of football practice pants and rest was yardage goods and WIP. Due to the nature of products, large portion of company’s sale was based on specific orders which enable Athletequip to maintain a fair production cycle.
The company started facing issues when the management its familiar bank changes and the new personnel was not able to meet the credit requirements of the company. The firm had been the consumer of Third First State Bank since its arrival. However, the ownership of the bank changes and the new management personnel was no longer familiar with the company’s principals. As a result of which, the bank was not able to meet the increasing credit needs of the firm because it would exceed its credit lending limit. In addition to this, Athletequip received an unsatisfactory response from the bank when it inquired about the services related to accounts reconciliation and payroll.
However, the company received a line of credit from Commerce National Bank worth $550,000 for the purpose of expanding its business. The firm rented its office and plant facilities which helped in achieving operating capacity in present location. Now, to move in near future Athletequip needed an investment of $400,000 for the purchase of new plant and equipment.
Issues in BUS308 Credit and lending unit
Following is the list of issues which were there in the course unit and are linked to the case study of Athletequip Company Inc.
- One issue was related to the credit analysis which is to be done by the bank of the company. Doing business with the firm or individual who is at high default risk can be a big issue for the banks. A proper credit analysis of Athletequip was required by its bank (Golin and Delhaise 2013).
- Another issue arises with the analysis of company’s financial statements. Banks have to use appropriate techniques so that they can come to know about the capability of the company for meeting its obligation of repaying the loan from its income.
- Managing the loan portfolio is itself a big task for the banks as the returns distribution are not normal and it is difficult to observe the market value of firm.
- There is an issue related to the loans whose repayments are not met or the probability of full payment has decreased. Banks are required to take corrective actions in respect of this. In addition to this, firms already get defaulted on some of its loan repayments due to several financial distress. This arises the problem for the banks as they will not be able to restructure the loans due to the interest of other creditors. The issue gets bigger when the debt held is wide and due to the claims which have different seniority (Rethel and Sinclair, 2012).
- The most common issue is the credit risk and liquidity risk which every bank is exposed with. Credit risk arises when the borrower or the company do not repay the amount as per the contract of loan. Issue related to liquidity risk arises when bank does not sufficient liquidity to meet the increasing demands. In that situation, it may either liquidate the assets or raise the debt by accepting new deposits.
All the above issues stated are somehow related to the case study of Athletequip Company Inc. as the company has faced a disrupt relationship with its bank and has also faced problems regarding raising funds for expanding its operations. These issues are further compared and contrasted with the pillars of wisdom and the problems mentioned in the article from the perspective of collection shops, lenders or banks.
Comparing and contrasting the issues
The article first addressed the issues related to the delinquencies on the end of customers and the reliance of money collectors on the phone channel with their consumers. The operations related to collection were not sophisticated and effective which requires lenders to invest more in smarter and effective operations. In earlier days, lenders or banks have faced an issue of misbehaviour and wrongdoings of their customer in regard of making repayments of loan.
On the other hand, the case study of Athletequip Company Inc. highlights the issue related to the banking relationship of the company with its bank named as Third First State Bank. This issue is in contrast with the issues mentioned in the article. As the article shows the perspective of banks and lenders whereas the case study points out the problems faced by Athletequip due to the change of its bank’s management. This put certain questions on the lending capacity of the bank and impacted the operations of the firm to a great extent.
However, the issues observed in coursework BUS308 Credit and lending unit are somehow related to the issues mentioned in the article. Both of them shows the perspective of the lenders, collection shops or banks. They highlights the challenges faced by banks in their collection process. The issues were related to the default on loan payments, credit analysis of the company, banks exposed to liquidity and credit risk and many more. As the new management personnel of Athletequip’s bank was not familiar with the principals of the company as a result of which it faces issues related to meeting their credit requirements. The bank needs to conduct a proper credit analysis of the company in order to know their liquidity position and ability to meet its loan obligations. From the view point of lenders or collectors, the main problem was to deal with the customers who were delinquent and were at default of making payments. The collection shops were always exposed to the risk of default in repayments of loans from the end of consumers.
In contrast to it, the main issue faced by the companies is to keep their historical record clean and to maintain a sound liquidity and solvency position so that they can easily apply for a loan to the bank. In case of Athletequip, the company faced many problems when ownership of its bank changes. The services provided by the lenders was unsatisfactory as the firm was not getting proper response from the bank managers.
This has created several problems for the company to raise funds and they might need to consider other sources for borrowing $400,000 for the purchase of new plant and equipment. While the issues mentioned in the article focused on the fact that banks or collection shops should enhance their process of collection by applying the seven approaches which will help them in avoid the risk of delinquent customers. One problem that is highlighted in the article is establishing a contact with the consumers and segmenting them on the basis of value-at-risk. Collectors need to used advanced technologies and deploy machine learning and VAR segmentations which will help them in prioritizing their customers and change their way of conducting operations.
The issues which were mentioned in the coursework unit are aligned to the article to some extent and are from the view point of bankers, lenders or collection shops. Apart from the credit analysis and liquidity risk, these people also faces challenges in respect of managing the loan portfolios, hiring a competent frontline staff which is responsible for performing collection operations and managing the performance of the workforce. All such are common issues faced by the banks and lenders. They need to work upon them by applying proper methods and techniques so that their process of collection can be enhanced and improved. The article provides 7 pillars of wisdom for collection which should be deployed by them so that banks can properly differentiate their customers who are at high risk and requires a direct personal contact with the ones who are not at high risk and do respond to the messages and emails of the banks.
In a nutshell, it can be said that the article and the case study provides contrasting views and issues. Article points out the issues from the view point or perspective of the banks or lenders whereas the case study shows the challenges faced by the Athletequip Company Inc., because of the change in the ownership of the bank. The new managers were not aware and familiar about the needs of the company and hence the company was facing problems in raising credit for its business. The services of the bank were proved to be unsatisfactory and no responses were received from their end. This eventually affect the banking relationship of Athletequip. On the other hand the article focused on the issues faced by the collectors in the market they operates in.
They found themselves with inadequate tools and staff to address and deal with the accounts which are at-risk, effectively and efficiently. They are also required to deal with the regulations made in respect of consumer protections and dominance of debt-settlement companies. Other issues are related to the delinquency of the customers and default on the loan payment form their end. In respect of overcoming all such issues, the article highlights seven pillars of wisdom or approaches that should be apply by the banks and lenders so that they can easily communicate with their customers and prioritize them according to the level of their risk. This will eventually improves the collection process of collectors. However, the issues mentioned in BUS308 course unit are somewhat related to the issues presented in the article. Both shows the perspective of banks.
From the above compare and contrast article, it can be concluded that both the banks and companies face equal challenges while conducting their operations. It is very important for them to maintain a healthy relationship as absence of it can have a significant impact on both of them. Companies have to face different challenges from the bank side and banks deals with different issues from the end of its customers whether individuals or firms. From the above, it is concluded the issues mentioned in the article are completely in contrast with those presented in the case study of Athletequip Company Inc. On comparison, it is concluded that the point of views of company and perspective of banks are totally different and each of them have their own kind of issues and challenges. Authors of the article shows the standpoint of collection shops, lenders or banks whereas the case study was focused on the outlook of Athletequip’s relationship with its bank.
Choudhry, Moorad, and Max Wong. 2013. An Introduction to Value-At-Risk. 5th ed. United Kingdom: John Wiley & Sons.
Iyengar, Vijayaragavan. 2009. Introduction to Banking. New Delhi: Excel Books.
Golin, Jonathan, and Philippe Delhaise. 2013. The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors. 2nd ed. Singapore: John Wiley & Sons.
Higginson, Matt, Frederic Jacques, and Roger Rudisuli. 2018. "The Seven Pillars of (Collections) Wisdom". Mckinsey & Company. Accessed June 30,
Rethel, Lena, and Timothy J. Sinclair. 2012. The problem with banks. U