Butler Lumber

Question 1: Why does Mr. Butler have to borrow so much money to support this profitable business?

Answer: First let’s take a look at what the current situation is for Mr. Butler;

• Rapid sales growth, reaching $3.6 million in 1991 (projected sales = $3.128 million).

• Anticipated increase in sales due to rapid growth (25%-35%).

• Doesn’t have enough money to manage operations, and is reliant on trade credit and late payment on account payables to help manage their cash flow.

• Therefore he needs to borrow money from current bank SNB, however requires an increase borrowing of a total amount of $247,000 for the year 1991.

• SNB asks to cover his loan with real property. Mr. Butler however wants a larger unsecured loan and looks to NNB.

• Company was founded in 1981 with Mr. Butler and Mr. Stark, but Butler bought out Stark for $105,000 and gained full control and equity of the business.

• The $105,000 had to be paid out in 1989 and he took out a loan of $70,000 to cover most of the payment.

• Loan was secured with property at a rate of 11%, payable quarterly over the next 10 years.

• Personal assets of Mr. Butler are; $72,000 mortgaged on a joint-house, therefore $38,000, and life insurance policy payable to his wife ($70,000).

As we can see from the exhibits (1 & 2) Mr. Butler can meet expected sales, but it is not possible without additional financing. If his goal is to eliminate trade debt and maintain his current bank and loan of $247,000, he would need an additional $157,000, and after taking away his trade credit of $33,000, his final would be exactly $124,000.

However his current bank SNB will not offer

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