Xedia And Silicon Valley Bank (A) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Xedia And Silicon Valley Bank (A) Case Study Help

Term:

The term of the loan is estimated to be 3 years as the bridge loan are short term loan with an average tenure of two weeks to three years. In addition, the warrant will have an expiry period of four years as warrants are exercised when the share price exceeds the strike price of the warrant. As it is projected that the share price will be 21 USD, based on the cash flow forecast of the next four years, exercising share at the end of the fourth year i.e. 2000 will provide a financial benefit of 0.22 million to the bank.

Collateral:

Granting bridge loan to the business is considered to be risky as the business is experiencing significant losses, is new in the industry and has poor credit rating considering, it is finding difficulty to borrow loans. Moreover, as bridge loans are short term loans and contains higher interest rates as compared to long term loans, there is a chance that the business might fail to repay the loan. Therefore, in order to borrow the loan, the business will need to secure 80% of the firm’s fixed assets which amount to 560 million USD as collateral or mortgage considering, there are less chances for the business to earn adequate returns.

Penalty for default:

As no interest repayment is charged by the business in the first two years, a penalty amounting to 15% of the loan amount will be charged by the bank to the business which will need to be paid in the third year of the projection in monthly installments along with the principal repayments.

Alternatives for Bridge Loan:

Working Capital Loan:

Alternatively, the business can raise the funds by borrowing working capital loans from SVB, these loans will have a low interest rate, will be sufficient for the business to manage day to day operations, and will require less bank charges as compared to bridge loan. However, loan up to 80% of accounts receivable, 20% of inventory and 80 – 100% of property plant and equipment. Therefore, the business will only be able to borrow 1380 US dollars as compared to funding requirement of 1.5 million USD.

Long term Source of Finance:

Alternatively, the organization can borrow long term loan form bank which will allow the business to raise funds for managing daily operations at affordable interest rates as compared to bridge loan. In addition, borrowing loan with a tenure of one to two years or before the next round of financing will ensure that adequate amount demanded by the business is granted. The long term loan will also save the penalty cost for the company as in bridge loan, 15% of the loan amount will be required to be paid at the end of the third year.

Conclusion:

Based on financial evaluation and qualitative analysis, it is concluded that loan should be granted to the business at an annual interest payment of more than 5% as it is the minimum return the institution requires form its investments. In addition, it was suggested that the warrant coverage for the bridge loan will be 6% of the loan amount and 0.015 million shares will be issued as warrants to the investor at a price of 6.23 US dollars with an exercise period of four years. Moreover, the repayment plan of the bridge loan was restructured which involved the repayment of the loan at the end of the year three with a penalty for default amounting to 15% of the loan amount...............................

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