Cash Connection Established by Allen Franks - Essay Example

Allen Franks established Cash Connection in 1986 with the purpose of lending cash. Starting with a single store in Shreveport, the potential offered by the ability to gain more profits led to his expansion. Nonetheless, the company suffered unprecedented decline in profits in 2007, which led to Allen’s inquiry on ways to increase his profit base. Hence, this expose elucidates the financial position of the company while considering the industry’s financial position. In addition, the expose will carry out a TOWS analysis that will investigate the threats, opportunities, weaknesses, and strengths that Cash Connection can optimize to position itself effectively in the payday lending industry. In the current business environment, ethics in business underline the way that managers make decisions and the public perceive an organization and the industry in which it operates, more so in an industry that was of a financial nature. Therefore, a discussion about Cash Connection will not be conclusive without discussing the ethical nature of the company’s operations. Finally, it is crucial to point out the recommendations, which are either short-term or long-term. These recommendations will help the company position itself in the market and enhance the ability of Cash Connection to improve its profits and differentiate itself from its many competitors. Cash Connection operations are within the banking sector. In this industry, restrictive costs imposed upon the industry by the government contribute to excessive liabilities. Such restrictions include auditing costs since the industry outsources auditors, which is a federal requirement in preparation of financial statements. For Cash Connection, the company experienced a decline in its profits in 2007 and 2008, with profits declining further in 2009 with growth in competition and the global financial crisis that contributed to the decline. The payday lending industry experiences a high debt to equity ratio, which is a result of the high amount of money companies borrow to lend to their customers. The customers may default on making the payment since they are aware of government’s protection. Conversely, companies in the payday lending industry do not offer common and preferred stocks due to consumer lending, quality of lending portfolios, and high operations cost. For Cash Connection, the ability of customers to take advantage of touch and go technology has made the company’s interest decrease since customer loans do not roll over with compounded interests. Nonetheless, customers preferred payday lenders to banks due to the simple nature of obtaining a loan from payday lenders and the low application fees. The main strength is Cash Connection’s ability to be the pioneer in this industry, which makes it the market leader for a start-up that cost $130,000. In addition, the company offered value added services that attracted more customers. Amongst the weaknesses, it is evident that the perception of existing and potential customers regarding payday lenders is not positive. In this case, customers associate these lenders with exploitation. In addition, the company’s weakness is its ability to lend only a maximum of $500, which is a result of state and federal regulations. The company’s main threats are the declining economy and increased competition. For example, the recent recession contributed to reduced borrowing, ability to pay, and increased risks to credit extension. Conversely, the company’s opportunity to grow lies among the unbanked population and other areas of future growth. In this regard, the case study indicated the willingness of 10% of the people to obtain a payday advance while half of this percentage did not know where to borrow, which is a gap that Cash Connection should fill. Ten million Americans remained either unbanked or under banked. However, Cash Connection cannot take the opportunity to offer them their lending services due to the requirement to have a checking account. Nonetheless, the company can use its position as a market leader to change this requirement in order to reach this population. In addition, the company can strategize in an approach that aimed at acquiring its competitors in order to reduce competition. Conversely, allowing the unbanked people to use Cash Connection services will enhance its public image as an organization that was not exploitative in comparison to its competitors in the same industry. In addition, the company can diversify to ensure continuous flow of interests and earnings by venturing into the gold marketing industry. In effect, this will improve its portfolio and caution it from unprecedented losses. As earlier indicated, the public image of payday lenders is not positive. In this case, there is a perception that payday lenders are exploitative since they take advantage of the weak members of the society. However, the stringent rules that govern this industry indicate that this was not the case, and it was a perception created by people who were unable to pay their loans. Conversely, it is evident that the operations of payday lenders were not ethical in comparison to the practices that banks and credit card companies used on their customers. Case in point, banks contributed to the recent financial crisis by giving mortgages to people whose incomes could not pay for the mortgages. Conversely, credit card providers, such as Providian, used unethical practices and issued credit cards to unbanked customers who did not meet the qualifications for credit cards. Unlike banks and credit card providers, the operations of payday lenders were ethical. In this case, the lenders did not engage in unscrupulous dealings of extending credit to people who could not pay, but offered credit facilities in accordance with the federal and state laws. One such regulation is the Fair Debt Collection Practices Act, which requires payday lenders to indicate their annual percentage rates and additional finance charges. In effect, this eliminates the possibility of any hidden fees in an agreement with payday lending institutions. In addition, the lenders only provide a maximum of $500 with state and federal laws benefitting the customer more since they outlawed criminal or civil actions against defaulters. Moreover, state laws regulations on rollovers were strict with their purpose aimed at benefitting the customer more than they benefitted the payday lenders. One study indicated that consumers preferred payday lenders to banks since banks had exorbitant charges. In addition, the study indicated the unlikelihood of consumers who took high interest loans becoming poor. In effect, this study emphasizes the importance of Cash Connection and similar payday lending companies. For this reason, payday lenders have to behave ethically in accordance with the federal and state laws. In this case, payday lenders recognize that the failure to observe and follow these regulations will have legal ramifications, which might result to their closure. Consequently, the laws benefit the consumers more than they benefit the service provider, which contrasts the notion and perception that payday lenders behaved unethically and exploited their customers. Therefore, the services offered by Cash Connection and other payday lenders, were aboveboard and enabled customers to pay their bills while simultaneously allowing customers to avoid payments on payments that were late. One important thing to for Cash Connection to do in the increasing competitive payday lending industry is to ensure that it distinguished itself from other competitors by offering differentiated services and products to its customers. It is common knowledge that in a saturated market, the only way that a company can maintain its competitive edge in the market is by ensuring that it remained distinct from its competitors. Fortunately, this works in favor of Cash Connection since the company’s president, Allen Franks, recognizes the importance of distinguishing the company from its competitors as crucial in the short-term lending industry. Hence, this case presents recommendations on various ways that Cash Connection can differentiate itself in the short-term and long-term objectives of the business. For the short-term, it is crucial to decrease the interest rates while simultaneously increasing banking fees to amounts that were acceptable to both parties in the industry. This recommendation is a result of two reasons. First, a large population is not aware of the role played by payday lenders. In this regard, their very nature of business sounds illegal to most people since they charge high interests in comparison to banks. Conversely, payday lenders charged less banking fees in comparison to banks, which made their nature of business confusing to most people. In effect, Cash Connection’s ability to reduce the interest rates in which it offered its loans to customers would ensure that it differentiated itself from its customers who would continue offering loans to their customers at higher interest rates than those offered by Cash Connection. In addition, the low interest rates would give the customers a perception that Cash Connection’s credit services were similar to those offered by banks. Hence, the perception that its activities were illegal will no longer exist. The second reason regarding this recommendation regards the ability of customers to be comfortable with the lending services. From the Cash Connection, this will enable the customers borrow more money despite their knowledge that the company can only “rollovers to three times.” In this regard, this is based on the premise of low banking fees controlled by the customers although they could not the interest rates. On the other hand, Cash Connection’s lower interest rates can enhance the company’s potential in setting up its operations in states such as Georgia and Maryland, which do not allow payday loans due to their high interests. For the long-term, the first recommendation is carrying out advertisements while focusing on the provisions of state and federal laws that guided the operations of payday lenders. In effect, potential customers will learn on the diminutive aspects that guided the operations of payday lenders such as the low risks associated with low repayment and allowing for rolling over for only three times. Consequently, the company’s ability to project its operations as ethical will clear the perception that the industry was unethical and exploitative. This way, the company will attract more customers to try its products and services, which will ensure market growth, success, and increase in profits. In addition, the company’s image will improve since customers will learn that the operations of payday lenders were aboveboard. Finally, it is important for Cash Connection to consider mergers and amalgamating with smaller and similar companies in the industry. In effect, the company will be able to eliminate potential and real competition while at the same time acquiring a larger customer base. Years 2008 2007 2006 Debt ratios 0.90 0.89 0.89 Net profit margin 0.054 0.21 No enough info Debt to equity 9.6 8.7 8.8 Return on total assets 0.010 0.039 No enough info Times interest earned 6.99 5.48 No enough info Read More