After thorough review and analysis of Butler Lumber’s financial reports, I believe that it is in the best interest of Northrup National Bank to not only approve the requested $465,000 loan, but look to increase the loan amount. A review of the 5 C’s will show in more detail the decision to approve this loan:
1. Capacity/Cash Flow: Butler runs a lean operation that has allowed them to have success due to competitive pricing. They have met their financing needs by increasing their debt (notes payable) in order to keep up with the demand. However, their borrowing had led conjunctly to an increase in sales. Net sales have increased 59% over the 1988-1990 timeline and have been projected to increase by another 34% in 1991. From 1988-1990, for every $1000 borrowed, net sales increased by $4,278.96. By utilizing leverage, they have been able maintain their free cash flow and maintain their current ratio over 1.0. Although Free Cash Flow and current ratio have dropped over the past year, Butler has made large investments which have proven able to give a higher return, which will have significant payoff in the long run. By doing this, they will continue to have the ability to pay interest to debtholders, repay debtholders, and buy short-term investments. As business continues to grow, debt obligations will decrease and their current ratio will be back on the rise. (See Exhibit 1 and Exhibit 2).
Based 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 line of credit. With the increased projection in sales, you are also seeing an increase in cost of goods sold. However, that number could be dramatically reduced if Butler had the appropriate capital or credit line to take advantage of the 2% discount for payments made within 10 days of the invoice date. If total cost of goods sold will 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 access to capital will allow Butler to run their business more efficiently.
2. Capital: Butler has a good level of net worth compared to total assets. This has been continuously increasing from 1988-1990 and will be even 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 three year span. By doing this they have been able to increase total assets at a much faster pace 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 debts, even if there were to be an economic downturn. They hold very little long term debt, so even with a decrease in sales they should be able to meet their financial obligations. They have equity in their plants and land and could utilize that if need be. Also, they have the ability to weather a crisis because of the amount of business that they have in home improvements. If there is a housing boom, people will look to build new houses, where as if there is a backup 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 pursuing 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 company and do not see the need to pursue personal collateral. We know that Mr. Butler currently has objections to using collateral, but if we can show him how having a large credit limit would be able to have a substantial positive impact to his bottom line, he should be comfortable with putting up company collateral and nothing personal. I would secure this using the company’s property as well as their...