GE Capital Canada.docx

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Department
Business Administration
Course
Business Administration 1220E
Professor
Sean Burkett
Semester
Fall

Description
GE Capital Canada: Commercial Equipment Financing Division Present Date: April 15 , 2003 You: Steve Rendi, assistant account manager for the Commercial Equipment Financing Division of GE Capital Canada Them: Clark Carriers Ltd. Clark Carriers Requesting: $270000 loan (to purchase two new 2003 Freightliner transport trucks, four new 53-foot trailers and four new mobile satellite systems to track the location of the transport trucks) GE Capital  Comprised of 27 diversified businesses  General Electric (parent company) was a publicly traded corporation with net earnings over $3.6 billion US in 2002  General Electric expected each of its divisions to generate a 20% after-tax profit, and if divisions fell below the goal, they would have to justify why this occurred Commercial Equipment Financing  Majority of CEF’s business was loans to medium and large-sized transportation and construction companies  Loans from $30000 to $1 million were provided to purchase assets such as transportation trucks, trailers, paving equipment, and heavy machinery  Motto: ““Find, Win, Keep”-find new business, win new business, and keep new and existing clients”  As at April 1, 2003, less than one percent of CEF’s portfolio of over 2000 accounts had been lost to bad debt  Account managers were expected to generate $14 million in new loans each year without exposing GE Capital to unreasonable levels of risk  Several minimum requirements had to be met before CEF would approve a loan: 1. CEF did not deal with any company that had been in business for less than three years 2. The company applying for the loan had to generate enough cash flow to cover the monthly interest payments of the new loan 3. The company’s debt to equity ratio could not be greater than 4:1 when including the new loan 4. CEF would not finance more than 90% value of any asset thereby requiring the company to have enough cash to pay for at least 10% of the value of assets they wished to purchase 5. CEF considered the character of the business owners, economic conditions, and any company assets that could be pledged as collateral as additional factors in the loan request The Transportation Industry in Southern Ontario  Strong from 1985 to 1988, went through recession 1989, came back strongly in the mid 1990s which led to lots of competition  By 2003, the transportation industry had experienced strong growth, but prices and profits remained low with trucking companies typically generating after-tax net incomes of less than 8% of revenue  With low prices, trucking companies relied on higher volumes of business to generate profits  One way to increase sales volume was to purchase more trucks and trailers and hire additional drivers (for every truck and trailer, a trucking company would typically generate $150000 to $200000 in annual sales), but required large loans  Because so many trucking companies borrowed money to expand, it was important to maximize the amount of time a truck spent on the road generating sales, to cover not only operating expenses but also the loan payments New Legislation  Mandatory that all trucks and trailers met safety standards  Effective February 2, 1998, MTO had the right to impound any truck or trailer deemed critical defect (loose or broken lug nuts, cracked brake rotors, broken steering components, broken suspension components and tires with less than 25% of the tread remaining across any part of the tire)  If defect found, impounded for 15 days and vehicle could not be operated until repaired (if same defect found during second inspection, 30 days impounded)  MTO also charged fines ranging from $2000 to $20000 for equipment that did not pass inspection  Thousands of trucks failed inspection and the MTO had impounded over 700 trucks from the inception of the program to October 2001 CLARK CARRIERS LTD. Background  Founded in 1987  Began as a one-truck operation hauling freight for larger company that contracted work to independent drivers  Doug was driver and wife Annette managed accounting  Survived recession between 1989 to 1993 and operated un
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