Coperate Finance Co-operate Finance The Butler Lumber Company will require $ 645,000, which will enable the company to expand its sales due to shortage of cash. The company’s management needs this amount since its sales is anticipated to increase in the spring of 1991. The amount requested by the company was further supported by the increase in the volume, of sales as shown by operating statements for the years 1988-1990 and for the three months ending March, 1991. The Company has negotiated with the new financial banking institution, which will be, able to give the company the cash they need in the form of secure loan.
The manager of the Butler Lumber Company has approached the Northrop National Bank which will extend its line of credit to the company. The Company loan request was boosted by the ready market for its products at all times and the fact that the sales prospect was favorable. The report by the bank investigator that the company‘s sales was expected to hit the projected target of $ 3.6 million in 1991 and was likely to supersede the target also boosted the confidence of the bank to give the loan to the company (Ehrhardt, 2008).
The trade discounts will help the Butler Lumber Company to expand its business due to increased company’s accounts and notes, which are, payable in the spring of 1991. This is further favored by the attractive terms of purchase in the trade discounts, which gave a discount of 2% for the payments made within 10 days of the invoice date. The trade discounts play a crucial role in ensuring that the company’s working capital is maintained thus favoring the company’s request for loans.
The company will also not incur losses as the trade discount ensures that the risks are spread and even if the customers delay, the business is cushioned from such eventualities (Ehrhardt, 2008). The trade discounts will also, play a role in times of economic downturn, which will decrease, the number of sales by the company as it will enable the company to foresee the possible causes and avert them before they cause any harm to the business.
The trade can help to lower the operational costs of the business thus will enable the Butler Lumber Company to expand its business and save its working capital which is attractive to the lending institutions. As a result, of giving customers trade discount, the customers are tempted to buy more and more goods thus, increases the sales of the company, which will maintain, the loan the loans from the banks (Ehrhardt, 2008). The trade discounts will enable the company become financially feasible thus giving the bank real analysis of the possibility of extending the credit facility to the company.
Trade discounts also boost the company’s balance sheet as the customers will pay their invoice earlier. Furthermore, trade discounts will enable the company to easily access bank loans, or lines of credit thus carrying less burden of debt, which will make them easy to repay their loan in time. The discounts will enable the company’s accounts grow and be able to pay the oldest payable first as the accounts receivable are collected (Ehrhardt, 2008). Mr. Butler should seek revolving loan, which he will commit himself on the time he need to repay the loan to the bank and the maximum amount of funds he needs.
This is because the company meets the seasonal requirements on the repayment period and the maximum amount needed by Mr. Butler. Unlike the unsecured loan, requested by Mr. Butler from the Northrop National Bank, revolving loan is used to fund permanent working capital requirements when equity and trade credit are limited to support the company’s sales volume. Furthermore, the revolving loan can be in the form of secure or insecure loan (Ehrhardt, 2008) References Ehrhardt, M.
& Brigham, F. (2008). Corporate Finance: A Focused Approach. New York, NY: Cengage Learning.