Butler Lumber Company Considers a New Line of Credit Essay

538 Words3 Pages
The reason why Butler Lumber Co. is considering finding a different line of credit is because they’ve nearly exhausted all their usable credit with Suburban National Bank, using up $247,000 of the $250,000 of the credit limit. To compile this issue, the bank is wishing to secure the loan with some of Butler’s property. Considering the company’s large debt ratios, they have decided to check with Northrop National Bank’s offer to extend their line of credit by $215,000.
Using the AFN equation, it was calculated (assuming there were no dividends paid, and that sales were expected to grow to $3.6 million) that the amount of extra funding needed would be approximately $76,360. This amount would
The company’s revenue stream had increased
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Butler should take on the expansion plan. The reason is that it provides nearly double the amount of capital than the previous line of credit provided by Suburban National Bank (about $215,000 more). Within the case, the advertising costs aren’t discussed; however it is mentioned that the company does all of its sales via telephone, excluding any sales representatives in their selling process. So one way that Butler could help push sales revenue even further was if the company were to hire either one or even multiple sales representatives to help push out the product to customers. If the cost of having sales representatives is a bit too high, the company could either limit the amount of sales representatives it needs to sell the products to customers, or it could try to hire sales representatives for the six month period in which 55% of the company’s revenue is generated.
The company’s debt ratios are 54.5% in 1988, 58.69% in 1989, 62.7% in 1990, and 67.37% in 1991. What this means is that the company is increasing its financial risk by taking on more leverage. The company has been taking an extensive amount of purchasing over the past couple of years, which could be the reason as to why net income has not grown much beyond several thousands of dollars. One could argue that the company is trying to expand its inventory to help accumulate future sales. But another problem is that the company’s

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