A Saudi Food Factory Seeking a Short-Term Loan

Case Background

The food product company is one of the companies in the food industry in Saudi Arabia which was incorporated in the year 1989. Its capitalization is SR200000000. It’s well endowed with the equipment which is necessary for the production in the industry. The facilities are of their own in Saudi Arabia and invest in the locally available food production materials which can be accessed easily. The company concentrates on various marketing strategies in the promotion of the company products.

The products are of high quality and attract a wide range of users both locally and internationally. Marketing of all the products has been its core to fight the alarming competition in the country as it is currently undergoing. The distribution channels used by the company are strategic and it ensures that the products of the company are availed to the consumers at their nearest locations as per their demands. The products produced are of high quality making the majority of the family members utilize the products of the company. The target of the company is to get access to the local market specifically the Saudi families in the product utilization and in the marketing strategies in place.

The Saudi families are the main consumers of the company products and hence, this is what makes them be the targeted group. The company is directly after having a controlling share of the domestic consumers in the country so as to have a stable base in production and also to overcome the increased competition in the country. Competition poses dire challenges to the company and by all means, it has to be within the control of the company so as to be ahead of all other food-producing companies. The various strategies of the other companies in packaging, and marketing, will have to be tamed by the food product company (Berdiev and Berdiev 239).

The company utilizes a very advanced technology that should be maximized in its use to attain a competitive advantage in the entire Kingdom and other neighboring markets. The production of the new products should be enhanced by the company so as to establish its brand name which should penetrate the market in an overwhelming manner and establish its own name and market.

The foodstuff produced by the company should be of high quality and its advancement in the technology used is very important hence the need for the company’s desire to access a viable loan which will be used to settle down its issues of the market demand. The company has been under critical measures to produce and distribute the various products demanded in the country but has been limited to the little capitalization at its disposal. The company is new production expansion is very important in the current market so as to establish itself in the country and withstand the competition challenges.

The company is very well endowed with resources that have made it possible to package and process various other food products. There are very many other products that the company utilizes in their new line of products such as the agricultural foodstuffs which the company is aspiring to maximize on their production.

The exposure of the Saudi market to international investors has posed a very vital challenge to the food company to expand and maintain its markets and be able to establish new relationships with other markets within and international.

The company also wants to overcome the issue of the several domestic and international producers in the country which by extending its ranges of production, it will create other markets which are substantial to the company’s future controlling stakes.

Study objectives

This study involves the assessment of the economic and the financial implications of the food company in accessing the financial boost through loans. The objective of the study also is to establish the various benefits of the loan accessed and how it will be utilized by the company in its expansion. The market competition also is indicated to determine the viability of the company expansion and its expected controlling stake in the food industry. The study also oversees the various ways in which the loan shall be put into use. The study also concentrates on the means by which the loan will be repaid over five years. The loan which the company is seeking is up to the tune of SR25million. The study also identifies the method which will be used in securing the loan. The loan effects to the company will be indicated in the study as it’s very important for the company to weigh its benefits and negative expectations of the loan besides its benefits.


The methods used for the study include observations, interviews, descriptive analysis, and talking to people in person. The observation method was used to get the details of how the retail shops were experiencing the shortages of the company products. This shows that the commodities of the company were in great demand and capacity expansion is necessary for ordered to meet the demand of the market. The interviews were conducted within the company premises with the employees and the people outside in various locations in order to ascertain the various effects of the expansion and the products of the company. The specialists who were interviewed also responded positively to the questions of how to get a loan, the way to secure it, and the means of repaying it.

In the descriptive analysis, various transactions of the company were analyzed to get the bottom line of the loan financing for the expansion The company accounts were analyzed to identify the viability of the loan and the expansion of the company in its productive capacity. The analysis also is necessary for the identification of the best rate which should be used to repay the loan within five years. The analysis also was done to ascertain the economic performance of the company and the whole country at large so as to come up with the viability of the loan. The financial implication of the company also is analyzed concerning the loan acquisition.

Talking to various people in the company and outside the company was necessary to ascertain the position and views of the company expansion plan through the use of loan financing. The people’s views are very important since they are the main people who are consuming the company goods hence their loyalty also is ascertained. The loyalty of the consumers is very important since they measure the market share of the company. This also will ensure that the expected changes by the company on its products are determined as a way of testing the market views so that the expansion program will be of great effect to the consumers and the company. The changes which the company also is to make during the expansion should be determined by gathering the views of the consumers especially on the quality of the products and the packaging.

Literature Review

There are several studies that have been made concerning loan financing for company expansion. There have been studies relating to the company seeking loan financing for the various expansion activities in the company. The food industry is not an exception in this matter. There are a lot of measures that have been put forward in the analysis for the loan financing before approaching a particular banking institution for it. According to Meggison and Est (2003), there has got to be clear adherence to the laws which regulate the lending activities in the country so as to have a binding lending contract. This also eliminates the issues of misunderstanding as to the interest rates to be paid and the maximum amount to be repaid in relation to the borrowed sum with a specific time frame. Meggison and Est further said that countries, where there are cases of political instability, will experience fewer lending services as this will greatly affect the bank’s operations as well as the operations of the company.

According to Qian and Strahan (2008), a country that has excellent laws which safeguard the interest of the person seeking financing of the loans is well preserved and assists the companies. In this case, they further indicated that the laws are the ones that protect the companies and persons seeking loans. There are low-interest rates in countries where there are laws that protect the companies in loan financing.

According to Crouhy, (2006) Companies with a good report or plan of the financial requirement will be issued loans by the lender. There is a need for the companies seeking loans to have a clear plan for the loan and be specific about the need for such loans. The companies also have been further described to be in a stable position in their operations to access the external loans. The lender has been described to be keen on the business plan for the expansion or any need for financial assistance for the company.

Herrmann (2009) said that companies seeking loan financing should have a good management staff and this has to be proven by attaching the resumes of all the major staff in the company. This will enable the lender to go through the details of the company and prospects in the market. Consideration of the market position as per demands will enable the lender to establish the creditworthiness of the company as per its operations. Companies have the desire to expand depending on the expansion activities which it has to undertake in the future. Companies that have good market conditions will always have the need to expand and when all the conditions such as the market conditions and the company strategies are well placed or prove them right, the company will always want to access the loan financing. There are various companies that may need expansion as soon as they begin their operations simply because of the rapid growth of the sector.

In the banking sector, Walker (2003) identified that the companies always prefer foreign banks since they offer good rates and better terms on lending. This has increased the competition on the domestic level. There have been supportive evidence presented by Carey and Nini (2008) about the foreign access to the loans which has positively affected the local companies and has enhanced the ease to access the service. Our study concentrates on the loans financed by the food company and its creditworthiness of the loan repayment period and the amount to be paid over the five years. Food Company is therefore seeking competitive interest rates from a bank that can either be local or foreign.

Saudi Banks and Loans

Saudi banks were highly hit by the financial crisis which was experienced in the year 2008 which extended its problems to the year 2009. The banks have experienced low earnings from the loan activities it is operating on. The banks have the problem of maintaining the previously high and stable earnings from loans. This has been experienced by all the banks with the two leading banks announcing a decline in the profits generated from the loan activities. The Samba Financial Group is one of the financial institutions which were highly hit by the decline in the earnings from the issuing of loans.

The main reason for the decline is that the banks had to come to the rescue of some firms which were undergoing a lot of difficulties in their financial status. The other reason for the decline of the earnings is that the banks restricted the lending activities during the financial crisis which had hit Saudi Arabia and the entire world. The banks could not risk lending during this time since all the sectors were hit by the financial crisis. This led to the banking institutions experiencing low growth in their credit activities. Another financial institution that was hit is the Banque Saudi Francis.

The banking institutions still have the problems of the banking sector stabilizing on the lending activities any time soon. The Samba and Francis are the main hit institutions that have experienced a big drop in their profits from the lending activities since the year 2000. Other banks include the Riyad and Sabb which have experienced low earnings in their lending activities this year. The first quarter of this year, 2010 has indicated a decline in the activities of the banks on the credit services. There is also the Saudi Hollandi bank which has experienced a decline in the activities in the lending just like other banks in this year’s 1st quarter profits on the lending activities.

It is quite clear that the banks in Saudi Arabia are not confident enough to lend more cash as usual since the effects of the 2008-2009 financial stress.

The banks are experiencing minimal demands for credit services from the various firms in the country. This is escalating the poor financial performance of the banks in the country when coupled with the lack of confidence by the banks to lend. The other additional effect on the loan provision access is the bank’s new conditions of applying for the loan. The banks have established new and tight requirements for one to be given the loans. The bank scrutinizes the applicants in detail along with various demands before allocating loans hence it has limited many firms to access the loan.

Assets and Claims of the Saudi Banks

The assets of the banks have indicated a substantial increase in this year’s 1st quarter. The central bank has indicated that the increase is by 8.5% in the 1st quarter. The assets increase has been measured as per the monthly increase. The month under which the increase has been reported is March 2010. The amount of cash held by the bank has increased by RO 193.3 million. This figure also includes the deposits held by the banks in the CBO. The bank shows that they have an excellent liquidity position. The outstanding amount which the banks have issued out as a credit rose by 543.1million by the end of this year March compared to its position in the last year.

This is a rise of 5.7%. There is a substantial amount of money which is accruing from the banks’ investments in the various securities both locally and internationally. This also has reported an increase by RO406.8 million. The bank claims a higher percentage of money from the CBO in its investments in the securities which have been on the increase compared to the year 2009.

The liabilities indicated on the final statements of the banks have shown an increase in the amount deposited. The increase has been experienced all through in each year which simply implies that the banking sector in Arabia is highly appreciated in its functions and its operations.

Loan in the Saudi banks

The loans in the banks in Saudi Arabia have experienced a decline in the loans and their deposits. The bank’s deposits have been declining and hence it has affected the amount issued by the banks to the borrowers. Loans are major assets to the bank and it’s the main activity on which banks depend for their financial growth. Loans affect the financial position of the banks as it has been experienced in the banks in Saudi Arabia.

The banks in Saudi Arabia reported a decline in profits due to diminishing rates of issuing the loans. The decline in profits is a very alarming way to the financial performance of the banks. Due to the poor performance in the loans in the banks, the investors are scared to make any borrowings from the banks and at the same time reduce their savings in the banks just in case of any deep effects on the financial performance in the bank.

The loans in the banking sector have to lead to the limitation of access to it by various firms which do not have enough capital to further their performance or expansion. Loans in the Saudi banks have been restricted to the firms which have been deeply scrutinized by the bank’s loans officers. The restrictions have to lead to limitations of the firms which want to access the loans from the banks. This affects the overall economy in the country since the performances of the other companies are affected. Companies rely on loans for the expansion of their activities. The loans decline by 6%, unlike the previous year.

Factors Affecting Loans

Loans are affected by the regulations which have been imposed on the banking sector. This regulation relates to the laws governing lending in a country that have been determined by the government. The lending laws are very important in the protection of both the creditor and the debtor. The other factor which affects the loans is the interest rates. The interest rates are set by the central bank on all the lending activities to the commercial banks which in turn applies the rate to the borrowers of the loans from the banks.

The interest rates affect the demand for loans especially when it has been raised beyond the level which the borrowers see as a high rate. The banks always influence the money in circulation through the increase or decrease in the interest rates. The rates are very important as a monetary policy that is used by the government to control the rates of inflation in the country. For one to qualify for a loan, the firm should be in a position to repay it.

Determination of the viability of the company is always evaluated by the bank and this is a facto which affects the loans. The overall performance of the econ0omy affects the loans. This is seen when there was a financial crisis in the world the bank’s lending declined substantially. The lending by the banks is affected by the historical performance of the account of the firm or person applying for the loan. If the account has a bad record, then the account holder is likely to be denied the amount applied for. The account has got to be well maintained by the applicant to be considered for it. The account should be fast enough as a guarantee for the amount being approved.

The other factor which affects the loans being issued is the credit history of the applicant. If the applicant has not been repaying the loan within the set or agreed period and the amount specified in the agreement then the loan is affected. The person applying for the loan should be credit worth the loan.

Risk Analysis for Commercial Loans

The risk of the loans has got to be predetermined by analyzing and coming up with a projected rate at which the loan is repayable. The risk of the loan is the proportion in which the loan is likely not to be repaid. The banks always have such a provision so as to safeguard their securities attached to the loan. The opportunities which the loans indicate are critically analyzed as to the various future repayments. The assets attached to the loan also is analyzed so as to determine how easy it is to convert it to cash and its worth also is determined so as to have its equitable value in the future discount.

The motives of the borrower should be critically determined so as to come up with the desires and the needs of the borrower. This will enable the lender to evaluate the risk associated with the lending. The lender also will be able to determine the amount or come up with a program that will be able to satisfy the borrower. This includes the loan borrowed, the time of repayment, security used, and the requirements for the applicant. Prediction of the borrowers’ abilities is very important in the risk analysis so as to have good measures in place regulating the activities.

There should be an in-depth analysis of the whole industry in which the lending activity is to be made. This will enhance the prediction of the whole performance in the industry which is not directly influenced or within the regulation of the financial institutions and the companies or individuals being issued with the loan. They are mostly factors that are beyond the banks and the borrowers’ ability to influence.

The borrowers’ business is deeply analyzed so as to determine the abilities of the management on handling the factors which hit the economy at large in adverse situations.

The financial statements of the borrower’s entity should be critically analyzed so as to read between the lines of its performance. There should be cash flow analysis which will enable the lender to determine the way the borrower is calculating its outstanding amount. Their lender also should have a loan arrangement that will indicate the possibilities of the borrower being issued the loan.

The technical part

Food Industry in Saudi Arabia

The food industry in Saudi Arabia relies on stuff which is from other countries. Most of the foodstuffs are imported. There are others that are locally produced. The vegetables are among those which are locally produced. There is also poultry and dairy processing which the local industry produces. The industry has tried so much in the processing of most of the products in the country and most of the raw materials of these goods are imported. Saudi Arabia has increased its own processing abilities especially in terms of the technology which is used. The food industry has increased its production units locally and targets its expansion to international scenes.

The facilities have been improved so as to be equitable to the current demands of the world. The industry has over 3657 industrial units with a capital totaling over SR256billion. It’s dominated by the business people and the individuals. The industry is entering into various agreements with other international firms which do enhance the company’s revenues such as Almarai which is working hand in hand with the Egypt-based company in the production of its juices (Walker 256).

International Importing to Saudi Arabia

The industry relies on imported foodstuff in the major production of the foods. The industry imports a lot of foodstuff from other countries which have affected the country’s prices of the products. The imported foodstuff are highly-priced which has increased the rate of inflation in the country. The industry imports mostly wheat and barley. There have been many measures and regulations which the industry considering to be put in place to facilitate the importation. There is the construction of the Jeddah port which will assist in handling the increasing importation of foodstuff such as barley and wheat (Porter 72).

This proves that the industry is very stable and is taking great care of the food security in the country. The countries in Saudi Arabia have been ignited and challenged to have several investments in the countries abroad to stabilize the importation and the prices. The issue of the lack of enough foodstuff and the international investments in the overseas countries has increased the abilities of the rising investments in the countries by the foreign companies and individuals. Saudi Arabia is the main consumer of wheat worldwide and hence it is the main importer from the producing countries. This is because Saudi Arabia eliminated their wheat production some years back which has now increased its demand to import the products from abroad.

Regional importing to Saudi Arabia

Saudi Arabia depends on food from outside the country. There are rules and regulations governing the exporters of the country. There is a standard that the exporters should meet which actually meets the requirements of the Saudi Arabian people. There is a dire need for water in the various countries in Saudi Arabia. These countries depend on supplies from international countries such as Ethiopia, Indonesia, and Egypt among others.

The countries in the country use the earnings from their income to purchase more of the foodstuffs from the outside countries. The regional countries depend on one another in terms of the locally produced goods to reduce the cost related to importation. The foodstuffs are very important in the country and the population is large. The majority of this is the youth who heavily depends on western foods. This has also contributed to the increase in the importation of foodstuffs from other countries.

Local producers in Saudi

There are quite a lot of companies which produce the foodstuff in the country specializing in their respective levels. The food industry has over 3600 factories which supply the whole country and other countries abroad. There are companies such as the Almarai Company, the Herfy, Saudi fisheries, the Savola Company among others which are the main local producers of foodstuffs. All the companies in the food industry produce their products which could be a substitute or a complementary good to the other companies’ production.

Company profile

Food Products Company was established in the year 1989. It was listed in the stock exchange in the same year and its capital share is SR200000000. The company has a highly skilled team of management and the employees also have acquired high skills in the production of the various food products. The company has been performing well over the years with its net profit for the last three years being 7.543M, 14.130M and 5.747M for the years 2007, 2008, and 2009 respectively.

The company’s performance was hardly hit by the global economic crisis which was an experience all over the world. The company has been able to overcome its challenges and currently it’s is working on all the conditions to overcome the competition being experienced in the country in the food industry. The company speculates that its production will be increased with access to the loan of SR25M which will be used for expansion. The company expects that the revenue will be increased due to the increase in the production lines and change in the product packaging.

Old performance of the company

The company has been able to perfume well despite the increase in the competition in the country over the recent years. The company generated a profit of 7, 543, 000 in the year 2007. The company experienced an increase in the income generated in the year 2008 which is doubled that of the year 2007 at a figure of 14,130,000. This shows that the company’s performance is very encouraging and can withstand all the economic storms which might be felt in the country or the whole world. The company was hit by the 2008 economic crisis which leads to the decline in its profits in the year 2009.

Uses of the short-term loan

The short-term loans are used by the company to finance the purchase of the immediate commodities which are to be used on the daily consumption in the production process. The company finances the purchase of the raw materials which will be used in the whole process of production. The raw materials in the company are the ones which lead to the production of the very daily products such as the pasta which are demanded daily. The short-term loans are very useful to the company in the sense that the company will be able to stabilize its activities in the whole process for the entire period.

Balance sheet analysis (ratios analysis):

Return on assets = Net profit/ Total Assets* 100

  • The year 2009

= 5,747 / 199,571 * 100

= 2.88

  • The year 2008

= 14,130 / 185,389 * 100

= 7.62

  • The year 2007

= 7,543 / 182,471 * 100

= 4.13

Net profit margin measures the profitability of the company after all the costs of producing have been deducted. The company has been experiencing an upward trend all through the seasons in the three years but in the year 2008; it shows a sudden increase which was so high, unlike other periods. This is the time the financial crisis was experienced in Arabian Arabia. Prior to and after the financial crisis, the company was experiencing an upward trend in its performance.

Current assets ratio

Current ratio = Current Assets / Current Liabilities

  • The year 2009

= Current assets = reported current assets plus the inventory

= 101762 / 18314

= 5.55

  • The year 2008

= 87317 / 11367

= 7.68

  • The year 2007

= 98152 / 19644

= 4.99

This ratio indicates the company’s performance and its capacity to meet its immediate needs in cash. The ratio also shows the effectiveness of the company to handle the immediate assets and liabilities. The ratio is very important to all the stakeholders, especially those who are interested in short-term relationships.

When the ratio is below one, then the company does not have enough money to meet the short-term demands. When the ratio is above one, it shows that the company’s liquidity is enough to settle all the short-term liabilities. The ratio will enable also the stakeholders like the creditor to know how the company is going to settle their demands in the short run. This ratio ensures that the company’s performance is as expected and enables the management to keep watch of all the functions it takes in the short run. The chart below shows the ratios for the three years. The ratios are Return on Assets and Current ratio.

Projected cash inflows and loan repayment
Projected cash inflows and loan repayment (Regression analysis should be made with charts)

Cash flows are used to identify the loans which have to be repaid by the company done by the bank and the company in the projection of its viability for loan qualification. The budget is prepared by the company and submitted to the bank to access the company viability of the company loans access. The company should submit the projected cost per every part of the type of the expansion program. The loan repayment will be calculated in terms of the bank’s decision depending on the cash flow status of the company.

Projected annual cash flows @ rate of 22% in ‘000’ Projected annual loan repayment in ‘000’ of the principal amount
2009 5747
2010 7011.34 2000
2011 8553.835 3000
2012 10435.678 4000
2013 12731.528 7000
2014 15532.464 9000

The charts below represent the cash flows and the projected annual loan repayment as per the table above.

the cash flows and the projected annual loan repayment

Regression analysis

The regression analysis is done for the amount to be paid as loan repayment about the cash flows of the company. Using the above figures of the cash flows and the projected loan repayment, we shall come up with a chart that indicates the relationships between the two variables. The loan to be repaid is determined by the cash flow which the company generates. The slope of the relationship is 0.76 obtained by:

Slope = change in the loan repayment / the change in the cash projected

Taking the loan repayment projections to be y and x representing the cash flows, we shall derive a formula of projections.

 loan repayment projections

The table above shows the linear regression of the projected cash flows and the loan repayment. The loan repayment depends on the cash flows of the company. It’s more proportional to one another since as the cash flows increase, the loan which is being repaid increases as well.

Analysis of risk

The company analysis is necessary to ascertain the company’s viability to access the loans. The company’s performance is very important for the determination of the future stakes in the company. The company which does not have a good reputation on the repayment of the loan will not be given the loan. In this case of the food product company, there is excellent performance and the company only needs the loans to access the expansion program of the respective sections. The company has experienced the easy flow of production and sale revenue over a short period (Crouhy 156).

Company risk

The company is experiencing great improvements after the crisis of the year 2008 which was experienced in the country. The company has shown excellent applications of the standards to withstand the storm and be able to perfume and make a good profit by the end of the period.

Management risk

The management is of excellent skills and professionalism at all levels especially in the production, pricing, marketing, sales, and distribution of the products. The customer service people engage people in a very positive way which is encouraging to all the stakeholders of the company. The company is highly prepared and respected in the country for its professional management. The company also has in place measures that cater to the management in case of any major problem which may lead to their absence, termination of service, hiring, and benefits. The company is well endowed with enormous resources which are very useful to the entire production and sales of the products (Yilmaz 46).

Competition in the market

Competition in the country is very high and the food production company is threatened. The companies which are in the market have higher use of the technology which makes the company have some challenges in the food industry in the country. The company needs loans to expand its services which will eventually increase its market share and the ability to compete with other food industries. The company needs to increase the technology used to make the services that are being provided to be excellent (Herrmann 124).

There is an increase in the foreign companies selling western foodstuffs which threatens the ability of the company to execute its service effectively. The company has not yet explored its expansion abilities in the foreign nations and hence the company needs to get the loan so as to increase its stakes in the foreign and domestic regions.

Chances of non-payment

The chances of nonpayment by the company are minimal. The company profitability is high hence there are no chances of the company repaying the loan. The company has established itself well and the ability of the company to make more profits are high hence the company will be able to increase its operations which leads to the company being able to increase the revenues generated. The company is in a position to secure a well endowed market hence its ability to fail the loan repayment is not speculated. The company is likely to increase its operations and will be able to attract more customers in the field since the company will package its products well with a loan issued. The company will also increase its revenues through the increase of the productions lines.

Projected profitability

The profitability of the company is expected to double by 2011 with an expansion program in place. The company also projects that the effects of the economic crisis which had hit the company in the years 2008 and 2009 will be over. The company will be able therefore to increase its revenues since the economy will be fully recovered. The company also will increase the revenues from the various markets which it will have acquired.


Major findings of the study

The findings are wide with the company’s ability to expand it services and the market share. The company is expected to access the loan and be able to actualize the expansion program. The company profitability is very encouraging which will make the company be able to create more wealth from the loan accessed. The company will be in a position to reclaim its profitability level after the economic crisis which was experienced in the 2008 and stretches itself to the year 2009. There is increase in the company’s ability to overcome the rise in the competition after the expansion has been attained.


The company should take the loan and utilize it in its expansion program. The strategies should be set right so as to overcome the competition.


Loan acquisition is very important for the Food Company in order to overcome the competition in the country. The company should utilize it appropriately.

Works cited

Berdiev, Neil, and Neil Berdiev. Loan Financing Guide for Small Business Owners. London: Small Business Empowerment, 2006.

Crouhy, Michel. The essentials of risk management. New York: McGraw-Hill Professional, 2006.

Herrmann, Andrea. One Political Economy, One Competitive Strategy. New York: Oxford University Press, 2009.

Porter, Michael. On Competition. Harvard Business Press, 2008.

Walker, Gordon. Modern Competitive Strategy. New York: McGraw-Hill International, 2003.

Yilmaz, Kadir. Manual for a Risk Management System for a Company: Risk and Contract Management. New Jersey: GRIN Verlag, 2009.