Butler Lumber Case Study

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. This is too much for a company this size, and with such little equity. The bank

is too aggressive with its forecast that BLC will have revenues of $3.6 million in 1991. I believe I am aggressive in forecasting they will

have $3.2 million in revenue in 1991, $400,000