- Group AH 1

THE BUTLER LUMBER COMPANY

A BRIEF BACKGROUND

• Butler Lumber Company is seeking to take out an additional loan in order for the business to sustain itself and grow in the coming years.

• Butler Lumber has the option to accept a loan of $250,000 from Suburban National Bank, or accept an unsecured revolving 90-day note of $465,000 at 10.5% interest from Northrop National Bank. 

• Mr. Butler has an either or option with the Northrop National i.e. he has to sever the relationship with Suburban National Bank if he choses the Northrop National Bank.

WHY DOES MR. BUTLER HAVE TO BORROW SO MUCH MONEY TO SUPPORT HIS PROFITABLE

BUSINESS?

Reasons/Benefits for the additional borrowing:

1. To avoid negative Cash flows, which’re there for the past few years

2. Liquidity

3. To reduce the growing collection period

4. Dwindling operating efficiency has led to the cash degeneration

5. To gain the advantage of getting discounts by paying early to the creditors

6. To meet the Working Capital requirements

7. To meet the annual instalment payments of $7000 to Stark for the next ten years

COMPANY’S LOAN REQUIREMENTS

Microsoft Excel Worksheet

AS A FINANCIAL ADVISOR

• As a financial advisor, I would suggest him to go with the loan, because

- taking the loan will help the company to grow

- increasing revenues implies growing company

- to avail early payment discounts of 2%, which would increase the net income by $19000

- taking the loan will help in employing more sales persons, which in turn will increase the sales

- 80% of his revenues are from the 2nd and 3rd quarters, i.e. he will working capital requirements to cater the expected sales of $2882000 in 2nd and 3rd quarter

AS A BANKER

• As a bank I would not give a loan of such high amount without any securities, because:

• Less equity to debt ratio

• Despite increase in sales, there is no increase in net income

• Aggressive forecast of revenues ($3.6m)

• Low margins

• But I would give him a loan of smaller amount or the same loan with the following conditions:

• By asking for personal property as collateral

• By asking for Insurance or any other assets as collateral

• with the condition that the Mr. Butler improves his collections period and methods

• Other conditions like covenants etc.