Butler Lumber Essay

After thorough inspection and analysis of pantryman Lumbers financial reports, I ge express that it is in the best take of Northrup case Bank to non only adore the requested $465,000 loan, notwithstanding tonicity to increase the loan amount. A review of the 5 Cs result show in more than(prenominal) detail the decision to approve this loan1. Capacity/Cash course Butler runs a lean ope proportionalityn that has provideed them to flummox success refer fit to war-ridden pricing. They collapse met their financing needinesss by increasing their debt (notes account pay adequate to(p)) in order to keep up with the demand. However, their borrowing had led conjunctly to an increase in sales. Net sales crap a bun in the oven increased 59% all over the 1988-1990 time neckc carve uph of business and pack been projected to increase by another 34% in 1991. From 1988-1990, for each $1000 borrowed, sack up sales increased by $4,278.96.By utilizing leverage, they have been able maintain their free cash flow and maintain their up-to-the-minute ratio over 1.0. Although Free Cash Flow and flowing ratio have dropped over the past year, Butler has made large sitements which have proven able to give a high return, which allow for have signifi fecest payoff in the long run. By doing this, they allow foring expect to have the ability to pay interest to debtholders, repay debtholders, and buy short-term investments. As business continues to grow, debt obligations go out decrease and their current ratio pull up stakes be back on the rise. (See Exhibit 1 and Exhibit 2).establish on this analysis, I believe the estimate for the loans requirements is light. I believe it would be in the best interest to pursue rolling the $247,000 owed to suburban National Bank onto this position of credit. With the increased projection in sales, you are alike holding an increase in cost of superbs sold. However, that number could be dramatically reduced if Butler ha d the appropriate great(p) or credit line to take usefulness of the 2% discount for payments made within 10 days of the invoice date. If total cost of goods sold volition be roughly $2 million in 1991, you could reduce that by over $40,000.00 simply by taking advantage of the 2% discount. Having quick crystalisetle to capital go forth allow Butler to run their business more efficiently.2. Capital Butler has a good take aim of net worth compared to total assets. This has been continuously increasing from 1988-1990 and will be nevertheless higher in 1991. The reason for this is going back to their use of leverage. They increased notes payable from nothing to $247,000 in the tether year span. By doing this they have been able to increase total assets at a much faster railyard than their borrowing. Butler will be able to continue to increase its capital ratio with their new line of credit. Even with an increase in liabilities, Butler should have no problem repaying their debt s, even if there were to be an scotch downturn. They hold very little long term debt, so even with a decrease in sales they should be able to beseeming their financial obligations. They have equity in their plants and globe and could utilize that if need be. Also, they have the ability to stomach a crisis because of the amount of business that they have in home improvements. If there is a ho utilise boom, people will look to build new posts, where as if there is a second-stringer in the housing market, people will stay in their house and do improvements.3. Collateral With rolling the almost $250,000.00 loan into this line of credit, and move the increase in the total line of credit, I believe that this loans should be secured. I would keep the loans secured by the assets of the gild and do not see the need to pursue person-to-person collateral. We know that Mr. Butler currently has objections to using collateral, precisely if we can show him how having a large credit jell would be able to have a substantial positive feign to his bottom line, he should be comfortable with putting up attach to collateral and nothing personal. I would secure this using the companys home as well as their inventory. At the residuum of the primary quarter of 1991, Butlers inventory was valued at $556,000 and its property at another $162,000.Because it would be such a large line that could help Butler Lumber, it demand to be understood that when working with that level of volume, some sort of collateral needs to be put up. We will be able to show how taking advantage of the 2 net 30 option, you can decrease cost of goods sold and increase net income with no st valuategic changes to business. Using this collateral would be a good way to recover some of the funds to reduce the loss if the company were to go bankrupt. However, when evaluating the performance of the company, it is believed that this company should be able to continue to let strong results regardless of the economy and that the securitizing of the loan is an added safety precaution receivable to the increase size of this line of credit.4. Conditions The first thing that needs to be determined is the limit on the credit line. It was originally requested to concur a limit of $465,000. However, it is recommended that we, as part of the approval process, refinance the current $247,000 loan to Suburban National Bank. If there were to be an get laid, we do not want there to be a conflict on who needs to be paid first. Mr. Butler has had a working kind with Suburban National Bank, but we do not see this to be an issue due(p) to the fact they are capping him at $250,000. It is recommended that the limit exceed $750,000.00 but be no greater than $1,000,000.00. There needs to be overflowing capital infusion that they can meet all needs, take advantage of supplier discounts, and take advantage of short term opportunities. However, we do not want to exceed $1,000,000.00 because we do no t want the company to nonplus overly aggressive and invest more an inventory then can be sold, leaving them overleveraged and at bigger risk of default due to economic downturns.Next, we need to determine an appropriate interest rate for this line of credit. Based on economic outlook, it would be in the best interest of Northrup to make this a fixed loan based on the choice rate of interest. From February of 1989 to January of 1991, the prime rate of interest has dropped almost 2% and we believe it is going to be downward trending for the next three to four eld before going back up (See Exhibit 3). Therefore, we believe we should do a prime plus 1% loan, giving an interest rate of 10%.As rates continue to drop, the value of this loan will continue to increase. If at any point we fear that this loan perchance paid off through an outside bank refinance, we can look to restructure this line of credit to a sink rate. Because this is a lower rate, we can pursue adding the balance of the loan to payoff the obligation of acquire out Henry Stark. This is at roughly a $70,000 balance, which is secured by land and buildings with an 11% interest rate. This will lower Butlers current debt obligations and will result in an increase in profit. Because this business appears to be in a growth phase, controls operations costs effectively, and has the ability to weather economic crisis better than others, this would be a good company to invest in.Next, we need to determine the duration of this line of credit. We need to clearly state that this will be reviewed every two to three years to revisit creditworthiness as well as ability to repay. If need be, the limit could be lowered. However, if the company continues to grow we can also survey the possibility of a credit limit increase.When determining fees, we need to realize that this is a competitive situation and they should be somewhat minimal. The commitment fee should be .50% per year. This waterfall right in line wit h the average. We will keep the closing fees at .25% in order to ensure they are on the low end and we can keep his business. We want to establish a working relationship with Mr. Butler so that we will be his only source of borrowing. We will not put a prepayment fee on this line of credit, but should continue to keep his business with reviews and potential changes and increases every two to three years.We also need to negotiate in appropriate covenants into this loan agreement. This will carry forward the reps and warrants that we have Mr. Butler sign. By adding the following covenants, we will be able mitigate risk for the bank and allow us to detect any signs for potential default early, allowing us time to evaluate our next steps before it is too late. The following covenants should be enter * Notification of borrowing outside of our bank* Detailed description of employ of loan proceeds * Quarterly Financial Reporting sent to Northrup * affirm ethical and legal responsibiliti es * Notification of any major business impacts such as mergers, acquisitions, and business model changes.By installing these conditions, it will allow us to properly forecast and negative business impacts and allow us to make appropriate modifications. We believe that because over 55% of Butlers business is in home improvement, economic downturns should not impact them as much as other businesses. Also, by now being able to take advantage of the 2 net 30 discount, the company will be able to instantly lower expenses and increase net income.5. character The character of Mark Butler is strong and it is believed that he would be a conscientious borrower. He is an extremely hard worker and takes a lot of pride in his business. He knows the business inside and out and possesses hold out judgment. He is well respected by his peers. All of this things make him a strong candidate for lending, because it appears that he will do everything in his situation in order to pay this loan back a nd on time. This includes tapping into personal equity form his home, his life insurance policy, or the interest that his married woman has in a separate property.