Butler Lumber Finance Case :: Business, Case Study, solution

Statement of firms positionButler pound off Company is looking for much cash due to a fast-paced lumber market and a shortage of funding. Their regular bank, Suburban home(a) Bank, is not willing to expand their exiting lend to an amount greater than $250,000 without securing the loan with real property. Another loan is being offered by a second bank, Northrup National Bank, for $465,000, with the disposition that the previous loan would be rolled into the second. The interest on the new loan would be prime + 2%.The co-founder, Mark Butler, owes a major distinguish to the other original partner, who Mark bought out. He has a mortgage on his 12-year-old house and no other significant investments. Marks personal references doom that he is hard-working and watches his production line very closely.Marks current outstanding debts are as followsBank note for $247,000Outstanding debt from trade partners $157,000Accounts payable $343,000 accrue expenses $51,000Current portion of long-term debt $7,000Long-term debt $43,000Total liabilities $848,000Net income is projected at $56,000 based on projected sales of $3.6m. Butlers business relies to a greater extent heavily on the repair industry than on new construction, so it is somewhat protected against market fluctuations on new construction. Major recommendationsNorthrup National Bank should extend the loan to Butler. The company will roll much of its existing debt into the new loan, without extending itself significantly further than it currently is, and at a more favorable rate. Butler has been successful in keeping current on its debts, and based on projections should have the means to start paying these debts down. From the banks perspective, theres little risk involved. With the industry expected to grow so much in the next year, Butler will be in a strong position, and potentially interested in borrowing more at the end of 1991.Butler Lumber Co. should take the short term loan and if necessary ro ll the $157,000 trade credit into it. Nature of the problemButlers short-term loan options are completely maxed out, so the company has no cash flexibility. Inventory levels indicate Mark is ramping up in expectation of the massive influx of sales in the warmer months. More of Butlers sales are in the warm months, when repairs are easier to make in the Inland Northwest. The loan will give Butler the ability to finance more inventory to meet the expected growth in sales.