Companies Finance

[Alonsua]

Hi there,

I would like to know if anyone has come with a set limit for company loans. So far I got the Social Engineering rules, but they have a problem: Aslong as the company makes profit, it does not actually specify any limit, so companies can take loans worth hundreds of billions of dollars.

Thank you.

[Donny Brook]

Can you elucidate further on your question?

[ericthered]

You're talking about page 46? That does have a soft limit: -3 in modifiers per x10 of the base amount, which is based on monthly income. If the business is making a profit, use that for the monthly income.

The company can turn around and invest that money for more income, yes, but it takes time to buy equipment, hire employees, and find new customers.

If I had PC's that were trying to get multiple loans from multiple sources, I'd either base the penalties on the total debt and plus recent failures, or demand they somehow separate the two sources. For example, they could try to get both corporate funding and a government grant. Doing so is a little dodgy, but perfect for PC's.

If you want an upper limit on how large a business can grow to be, that's a setting issue, not a rules one.

[Alonsua]

Originally Posted by Donny Brook

Can you elucidate further on your question?

Of course xD

By mixing some rules and working out a few more, you can start a company and turn yearly profits valued at 6% of the total assets with an estimated average factor of "(Finance-10)*0.05+1". Then by rules like p. 46 Social Engineering you can ask for loans up to a factor of X at your current monthly salaries/profits, with a selection of sources among Administration, Finance, Politics, Savoir-Faire (High Society) and Streetwise. For elite characters (let´s say Skill=18) with a few perks like Networked (Fundraising) and Teamwork, this translates into about monthly salaries/profits x 260. Not accounting for interest rates, this means that for a company with a book value of 200 billions you can get loans worth up to "(200*0.06*1.8/12)*260" = 468 billions.

I am not an expert on finances, but I would think that no matter the source, there won´t be many willing to put so much money in a single basket, no matter what the company valuation actually is. Am I wrong?

[Alonsua]

Originally Posted by ericthered

You're talking about page 46? That does have a soft limit: -3 in modifiers per x10 of the base amount, which is based on monthly income. If the business is making a profit, use that for the monthly income.

The company can turn around and invest that money for more income, yes, but it takes time to buy equipment, hire employees, and find new customers.

If I had PC's that were trying to get multiple loans from multiple sources, I'd either base the penalties on the total debt and plus recent failures, or demand they somehow separate the two sources. For example, they could try to get both corporate funding and a government grant. Doing so is a little dodgy, but perfect for PC's.

If you want an upper limit on how large a business can grow to be, that's a setting issue, not a rules one.

Yes, I would think that in the real world and no matter the source or the company valuation, there would be little to none willing to risk some trillions in a single basket, but I am not an expert in finances, so I may be wrong?

[Anaraxes]

Loan amounts are based on the lender's perception of the borrower's ability to repay. If you earn enough to service the debt (make the payments), they're good. The loan amount per se isn't that important, though of course it's one of the primary determinants of how big your payments are going to be.

In reality, it's a fuzzy question, which is why I used the word "perception", especially since one of the factors influencing the loan cost (interest rate) is the risk that the borrower won't repay.

For game purposes, you might steal some guidelines, and just have an arbitrary cap of, say, total debt, after this loan, at most four times equity. (That one I stole from the US Small Business Administration; it really varies by industry.) For a new business, it's more stringent, a maximum 3:1 debt/equity ratio.

Riskier loans might have lenders demand collateral, and only loan up to some fraction of the market value of that collateral. (In corporate terms, this is more like a "bond" than a "loan".)

Lenders are of course limited in the size of the loans they can make by their own assets as well. You can't borrow hundreds of billions from someone that doesn't have hundreds of billions.

[Alonsua]

Originally Posted by Anaraxes

Loan amounts are based on the lender's perception of the borrower's ability to repay. If you earn enough to service the debt (make the payments), they're good. The loan amount per se isn't that important, though of course it's one of the primary determinants of how big your payments are going to be.

In reality, it's a fuzzy question, which is why I used the word "perception", especially since one of the factors influencing the loan cost (interest rate) is the risk that the borrower won't repay.

For game purposes, you might steal some guidelines, and just have an arbitrary cap of, say, total debt, after this loan, at most four times equity. (That one I stole from the US Small Business Administration; it really varies by industry.) For a new business, it's more stringent, a maximum 3:1 debt/equity ratio.

Riskier loans might have lenders demand collateral, and only loan up to some fraction of the market value of that collateral. (In corporate terms, this is more like a "bond" than a "loan".)

Lenders are of course limited in the size of the loans they can make by their own assets as well. You can't borrow hundreds of billions from someone that doesn't have hundreds of billions.

So now you got a company with a book value of 200 billions, with a debt/equity ratio of 0. Is it fine and realistic for that company to borrow 800 billion dollars?

[Alonsua]

Originally Posted by Anaraxes

Loan amounts are based on the lender's perception of the borrower's ability to repay. If you earn enough to service the debt (make the payments), they're good. The loan amount per se isn't that important, though of course it's one of the primary determinants of how big your payments are going to be.

In reality, it's a fuzzy question, which is why I used the word "perception", especially since one of the factors influencing the loan cost (interest rate) is the risk that the borrower won't repay.

For game purposes, you might steal some guidelines, and just have an arbitrary cap of, say, total debt, after this loan, at most four times equity. (That one I stole from the US Small Business Administration; it really varies by industry.) For a new business, it's more stringent, a maximum 3:1 debt/equity ratio.

Riskier loans might have lenders demand collateral, and only loan up to some fraction of the market value of that collateral. (In corporate terms, this is more like a "bond" than a "loan".)

Lenders are of course limited in the size of the loans they can make by their own assets as well. You can't borrow hundreds of billions from someone that doesn't have hundreds of billions.

Specifically I got this numbers:

Equity: $ 330.660.000.000
"Profits": $ 43.356.000.000/year
Total Debt: $ 58.572.800.000 at 6% interest rate ($ 3.514.368.000/year)

This gives a D/E of about 0.18, if I allow a D/E of 3.0, I would be allowing this company to borrow 932.461 billions, but I dont think such a precedent exists in human history, so what is the maximum with a precedent?

[AlexanderHowl]

Unfortunately, Social Engineering does not reflect the lunacy of reality, which is that lenders can be just as irrational as borrowers. If that had not been the case, we would not have gotten the Dot Com Bubble in the late 1990, the Housing Bubble of the late 2000s, or the current Stock Bubble (the current value of the stock market would only be sustainable if the global GDP was three times its current level). In all of these cases, lenders gave money to borrowers who invested it unwisely because experts had been convinced that this time, economic reality did not apply.

A conservative estimate of debt-to-earnings ratio is that a company should not be spending more than fifty percent of its net income on capital repayment. Since interest is tax deductible in many nations, we focus on capital repayment rather than loan repayment (which is capital plus interest). So, if you have a company with a net income of $100 million per year, it should not pay more than $50 million per year on capital repayment. If the capital repayment rate of a loan is 5% per year (a 20 year loan), then that means that a company with a net income of $100 million per year could potentially burrow up to $1 billion per year. The gross revenues of the company might be anywhere from $500 million per year to $2 billion per year, depending on the industry and the profitability of the company.

In order to clarify, I will explain the terms that I use. Gross revenue is the amount of money earned by a company from its activities. Net revenue is the amount of money earned by a company after paying its expenses. Gross profit is the amount of money earned by a company after applicable deductions, which vary from nation to nation (charitable deductions in the USA, charitable deductions and dividend payments in Canada, etc). Net profit is the amount of money earned by a company after paying its taxes. Since interest is deductible in many nations, the interest rates of a loan do not really matter unless they reduce gross profit below 10% of gross revenue, then they really matter because the company is starting to lose financial flexibility.

In general, companies pay income tax on gross profits, which is why corporate income taxes have little to no impact on job creation (since wages are expenses and reduce taxable gross income). Property taxes and sales taxes have much more impact on job creation because the former taxes assets (like capital investments) while the latter taxes consumption (making the products or services the company sales more expensive to the consumer). Because all tax rates impact gross profits, taxes generally reduce the ability of companies to borrow.

[Donny Brook]

Originally Posted by Alonsua

Of course xD

By mixing some rules and working out a few more, you can start a company and turn yearly profits valued at 6% of the total assets with an estimated average factor of "(Finance-10)*0.05+1". Then by rules like p. 46 Social Engineering you can ask for loans up to a factor of X at your current monthly salaries/profits, with a selection of sources among Administration, Finance, Politics, Savoir-Faire (High Society) and Streetwise. For elite characters (let´s say Skill=18) with a few perks like Networked (Fundraising) and Teamwork, this translates into about monthly salaries/profits x 260. Not accounting for interest rates, this means that for a company with a book value of 200 billions you can get loans worth up to "(200*0.06*1.8/12)*260" = 468 billions.

I am not an expert on finances, but I would think that no matter the source, there won´t be many willing to put so much money in a single basket, no matter what the company valuation actually is. Am I wrong?

I'm curious which rules you are referencing in your first sentence. Also I don't understand how you arrive at a book value in your first paragraph or develop the equations you are using from what is published on SE46 (e.g. salaries are not mentioned in the section as far as I can tell).

That said, from a RW perspective, most established companies seeking very large amounts of credit will indeed not be funded from a single large source. More frequently several large lenders will each contribute a part of the loan, or the business will offer bonds for sale in the public market with potentially thousands of investors supplying parts of the overall borrowings.

Most lenders will want to have a high degree of certainty that the borrower has sufficient sustained cash flow to make the required payments, and secondarily assets to foreclose on in the event of default.

Lenders are much less concerned with profits because profits are calculated after all costs (including the cost of debt repayments). As long as the loan payments are covered, the amount of profit remaining after that is not of concern to the lenders.

On RW public markets, the ratio of debt to assets depends a lot on the nature of the company. A very stable business with large assets (e.g. a utility or real estate company) can often have a high (e.g. 3:1 to 5:1) debt/equity ratio (note that equity is a technical term with a meaningful definition), while businesses with less stable cash flow and fewer tangible assets will often be unattractive risks at even 1:1.

Here is an instructive table of large companies carrying large debt: https://web.tmxmoney.com/screener.php?qm_page=64050