Rural Development: Rural Business-Cooperative Service Business Loan Losses Page: 19 of 29
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Loans, Loan Losses, and Loan File
Documentation for 24 Guaranteed Business
and Industry Loans
Loss study plan
The company had sustained losses for
several years before obtaining the loan
because of increasing competition from other
retailers. A feasibility study was waived
because collateral appeared sufficient, but
past performance indicated a troubled
company, so a feasibility study should have
been done. The company started closing
stores 3 months after obtaining the loan
because of losses. The owners struggled
with declining sales until liquidation was the
As sales declined during a renovation in
1994, the company incurred net losses. A
feasibility study would have been prudent.
After obtaining the loan, the business was
affected by competition from Mexico and the
death of the owner. Service officials indicated
there were concerns about financial
A service loan specialist advised against
guaranteeing this loan, saying the company
would be too highly leveraged and
vulnerable to losses. A feasibility study
should have been done. However, the loan
guarantee was approved without comment.
Warranty expenses on the company's new
engine were higher than expected, sales
lagged, and liquidity problems developed.
The company had a $332,000 loss the year
before the loan guarantee was approved.
The company had poor liquidity ratios and
high indebtedness with the loan-a feasibility
study should have been done. Management
problems were evident-the owner was
inattentive to the business-and losses
continued as products were priced below
The business needed to increase its sales to
succeed in its new location-it could have
benefited from a feasibility study. After sales
problems developed, a business consultant
hired by the company stated that the
borrower's investment in the new facility was
too large for the sales market. The company
then filed for bankruptcy and sold the
business to another auto dealership at a
GAO/RCED-99-249 Rural Business and Industry Loans
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United States. General Accounting Office. Rural Development: Rural Business-Cooperative Service Business Loan Losses, report, August 25, 1999; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc290922/m1/19/: accessed May 21, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.