Case Study Objective: As Mr. Butler’s financial advisor, would you
give urge him to go ahead with, or reconsider, his anticipated
expansion and his plans for additional debt financing? As the banker,
would you approve Mr. Butler’s loan request, and, if so, what
conditions would you put on the loan.
The maximum loan that the Butler Lumber Company (BLC) could obtain
from Suburban National was $250,000 in which his property would be
used to secure the loan. Northrop National Bank offered BLC a line of
credit of up to $465,000. BLC would have to sever ties with Suburban
National if they were to have this LOC extended to them.
As Mr. Butlers financial advisor, I would advise him to take the loan in an
attempt to grow the business. One alarming fact about his business is
the lack of a sales staff, yet the revenue has been able to grow at a fast
pace; 18% in 1989, 34% in 1990, 19% in 1991. By adding another an
experienced salesman that is working for a base salary plus
commission, they can grow the revenues even more. By having this
person work on commission, this will eat into the profit margin for the
materials he is selling. But the net impact to the BLC will be positive. I
would advise Mr. Butler to select the LOC for up to $465,000 because he
can take out as little as he needs. He does not need all $465,000 this
quarter, but he may need some in the first and last quarters of the year
because he obtains 55% of his revenues in the second and third
quarters. So it is strategically important for him to have access to this
capital because of the nature of his cyclical business.
As a banker, I would not grant BLC a LOC for $465,000. Th ...