Case E

Bryce Morisako Melissa Hsu

Abu Faiz (Rafsun)

Loan Approval

• Company Name: Electrical Distributors, Inc.• Loan Type: Long-Term Bank Loan • Amount: $243,000 • Tenor: 5 Year Maturity

Business Description

• Electrical Distributors, Inc. is a wholesale distributor of small electrical components located in the suburbs of a large Midwestern city– Small electrical components consist of wires,

switches, relays, and fire boxes– Primary customer base: Small local contractors

Why Company Needs Loan?

• Refinance an existing bank loan and increase the amount of credit to meet the needs of the higher working capital

• Pay off debt to trade creditors to earn a two percent purchase discount to further differentiate ourselves as a cost leader

• Provide the company with the financial flexibility needed to meet anticipated increases in sales

Why Loan Recommended?

• Competitive pricing (supplier discount) and extremely low operating costs results in sustainable operating income.

• Strategic PP&E Investment, strong management (conservative), and efficient business operations leads higher current and quick ratios

• Company has sufficient net operating income and assets to service it’s debt obligations in a timely manner.

• If they are to default, the collateral claimed by our company could be easily sold, given that they are commodity products – illustrated by the strong asset coverage ratio

• Losses on bad debt, in recent years have been small

Risks• Company’s sales are counter-cyclical and highly dependent on

seasonal sales (2nd & 3rd Q)– When the economy is doing well, sales will be uncertain. Also, weak 2nd &

3rd Q sales hurt the company in proportion to 1st & 4th Q sales.• Company has low gross margins due to high variable cost and low

fixed costs. Lower volume sales would make the company unprofitable

• Company currently has operational business risks: no sales team and lower quality fixed assets to sustain the growth

• Upon taking the loan, 67% of their assets are financed by debt, indicating lower organic growth

• Company has an unfavorable lease contract – creates uncertainty in regards to business operations (30 day lease termination policy)

Extra Credit

Pay in 10 days to get a 2% discount & borrow more OR Pay in 30 days with no discount or borrowing

It DEPENDS on the loan term. • If the company is able to borrow monthly (see

example in notes for details), then paying in 10 days is the recommended strategy

• If the company is only able to borrow yearly, then paying in 30 days is recommended