The COSO Framework for Internal Control
February 12, 2025
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Firms often give loans or extend credit over extended periods of time. The credit extended may continue for years and even decades. It is possible for the management of the company to change during this period. It is also possible for the cash flow position of the company to change during this period. Hence, it is important to have an exit strategy while extending credit.
Many multinational companies around the world have made it mandatory to have an exit strategy in place before making any investment. In this article, we will look at the various situations in which the exit strategy of the company is likely to change as well as the common mechanisms which are used to exit the investment.
There are several reasons which could cause an organization to re-evaluate its credit risk profile and then decide to exit some of its current investments. Some of these reasons have been mentioned below:
Exiting a debt investment mid-way is not easy. Particularly, if the possibility of such an exit has not been planned. In the mature capital markets of today, exiting investments is possible. Some of the common ways in which this is executed has been mentioned below:
Lastly, there are many banks and financial institutions around the world which are engaged in processes such as factoring and forfaiting without recourse. The end result of each of these transactions is that the debt and the associated risk are soon moved off the books.
For instance, when creditors start defaulting, many banks provide a forbearance period to their borrowers. Borrowers can then use this period to streamline their cash flow situation and make their debt viable again. In certain other cases, it is also possible for lenders to have the right to call on the entire debt. If the borrower is not able to pay, then the underlying asset may be sold off in order to recover the dues.
Products like credit default swaps, credit spread futures, and collateralized debt obligations have been on the rise in the recent past. These products act as insurance for the companies. Once they have purchased these contracts, they can stop worrying about the relevant credit exposure.
The bottom line is that organizations must have an exit plan in place while extending credit. In the absence of an exit plan, companies will be forced to hold on to their debts for long durations of time and their performance will be hampered.
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