Sunflower Manufacturing recently applied for a $10 million loan at The Democrat Federal Bank (known simply
as The Democrat). The purpose of the loan is to support its working capital needs (short-term funds) during
the next nine months. Sunflower has been a loyal customer of the bank for many years and has been
extended whatever amount of credit it requested in the past.
Sheli Crocker, who is a new, young loan officer at The Democrat, reviewed Sunflower's loan application and
decided to turn down the loan for the requested amount. In her report to Henry, her boss and the senior loan
officer, Sheli indicated that she thought Sunflower would have trouble repaying a $10 million loan because its
financial positions has deteriorated in recent months. Sheli noted that the company's ability to pay its current
obligation - that is, its liquidity position - is poor and that analysts are pessimistic about Sunflower's ability to
improve its liquidity during the next two years. As a result, Sheli recommended that Sunflower's request for
$10 million should be denied. She did indicate, however, that she thought it would be appropriate for the
bank to lend a smaller amount, up to a maximum of $2 million.
Earlier today, Henry called Sheli into his office to discuss her report because he wanted her to reconsider her
recommendation. Henry told Sheli that he thought the bank should extend the $10 million loan to Sunflower
because the company has been a model customer in the past, and the bank should not abandon a loyal
customer just because it might have some short-term financial difficulties. Sheli explained that Sunflower's
financial numbers indicate that the firm can handle only a $2 million loan. In addition, she said that the cash
budget that was provided with the loan application was "suspicious" because the numbers didn't seem to
match Sunflower's other financial statements and recent activity in the company's bank accounts.
Henry instructed Sheli to return to her office and reevaluate Sunflower's loan application. He suggested that
Sheli should consider the loyalty the company has shown to the bank over the years. In fact, Henry told Sheli
that he believed customer loyalty should be the primary consideration when determining to whom the bank
should lend money. Further, Henry indicated that he thought Sunflower would go to another bank, perhaps to
its archrival, The Republican National Bank (affectionately known as The Republican), for the loan unless The
Democrat approved a loan for the entire $10 million that was requested. And, if a competing bank granted
Sunflower the loan, The Democrat probably would lose all of the company's business, including its checking
account, payroll management, and receivables management.
After reconsidering the financial numbers, Sheli did not change her mind. In fact, she was even more
convinced that the loan should not be made because both Sunflower's financial position and it's ability to
generate the necessary cash flows in recent months suggest that the bank would be making a big mistake if
the loan were granted. but, because it was the end of the accounting period and Sheli knew that her
department had not generated its quota of loans, she was trying to determine what actions she might be able
to take to make the loan application more attractive. In the back of her mind, she couldn't forget her earlier
discussion with Henry in which he reminded her of the importance of meeting loan quotas; he suggested that
jobs could be lost if quotas weren't attained.
Another factor that Sheli has to consider is that The Democrat was in a somewhat precarious financial position
itself. The Democrat had been losing business to competing banks, especially to The Republican, during the
past few years. The loss of business had caused a significant decline in The Democrat's growth. What should
Sheli do? What would you do if you were in Sheli's position?
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