Emergency loans, Bankruptcy, and you

     An emergency loan is an unfortunate side-effect of expanding too rapidly or over-estimating your firm's ability to generate demand.  Overspending leads to emergency loans, emergency loans lead to bankruptcy, and bankruptcy leads to a very difficult simulation.  

     It is particularly important to forecast your cash position at the close of the books for the current quarter. It is absolutely imperative to end each quarter with a positive cash position. If you overestimate demand and generate insufficient revenue is generated from sales, then an emergency loan will be taken out for the firm to cover the firm's deficit. As a general rule, your pro forma cash balance should be at least 300,000 in the early quarters of the simulation and probably more than 500,000 in quarters 6 and above.

     If you fail to keep a positive cash position your bank has the authority to take out an emergency loan from a loan shark on your behalf to correct this situation.  The loan shark is a very tough businessman who charges an exorbitant interest rate, requires repayment in the next quarter, and takes an equity position in your company in exchange for keeping your firm from becoming insolvent. The interest rate is a sliding scale that begins at 5% per quarter and may go as high as 25% per quarter.  Repayment of an emergency loan is done automatically at the end of each quarter. He is repaid with whatever cash your firm has on-hand.  

     The Loan Shark will take his repayment from you until you have $1 left in your account. He is not entirely heartless, however, and repaying an emergency loan will not cause you to take on another emergency loan.  It may be necessary to cut back spending for at least 1 quarter in order to have enough money to fully repay the Loan Shark.

     The Loan Shark requires an equity position in your company in return for the favor of honoring the checks marked "insufficient funds" by the bank. For each 100 that he places in your checking account, he will take one share of stock in your firm. If you have a 100,000 emergency loan, he will take 1,000 shares of stock. A 1,000,000 loan will cause the Loan Shark to take 10,000 shares of stock.  The stock owned by the loan shark causes a dilution of your stock and reduces its value to yourself and the venture capitalists. In other words, your share of the company will decline as you use emergency loans.

     If the Loan Shark makes too many offers and you are not able to refuse them, you may enter into bankruptcy.  



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