4.4.4 Emergency Loans
Financial transactions are carried on throughout the year directly from your cash account. If you manage your cash position poorly and run out of cash, the simulation will give you an emergency loan to cover the shortfall. The loan comes from a gentleman named Big Al, who arrives at your door with a checkbook and a smile. Big Al lends you the exact amount of your shortfall. You pay one year’s worth of current debt interest on the loan and Big Al adds a 7.5% penalty fee on top to make it worth his while.
For example, suppose the current debt interest rate is 10% and you are short $10,000,000 on December 31. You pay one year’s worth of interest on the $10,000,000 ($1,000,000) plus an additional 7.5% or $750,000 penalty.
Emergency loans are combined with any current debt from last year. The total amount displays in the Due This Year cell under Current Debt.
You do not need to do anything special to repay an emergency loan. However, you need to decide what to do with the current debt (pay it off, re-borrow it, etc.). The interest penalty only applies to the year in which the emergency loan is taken, not to future years.
Emergency loans depress stock prices, even when you are profitable. Stockholders take a dim view of your performance when they witness a liquidity crisis.
Emergency loans are often encountered when last year’s sales forecasts were higher than actual sales or when the Finance Department failed to raise funds needed for expenditures like capacity and automation purchases.