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Business Borrowing 101 ... from your banker's point of view - Part 1 of 4: The Need To Borrow

by Mr. Mike Sanders


The Scene

Let's say ... you are the son of a sole-proprietor business owner who owns a seasoned manufacturing company that manufactures golf clubs. Dad started the business from scratch and is still using original equipment, tools and dies. He has a great reputation. The product is widely sold to many wholesale distribution customers on credit terMs After getting your MBA and a little real world experience, Dad has invited you to join the company and take it to the "next level".

The Analysis

Your initial financial analysis reveals that the company has a solid balance sheet. There is limited cash in the bank as Dad has taken regular distributions (to pay for your high priced education). Business assets include raw materials, work in process, finished goods inventory, accounts receivables and equipment. The company has only monthly payables for debt and a positive net worth reflecting the value of the net assets. The company is housed in a building that is owned by Mom and Dad and leased to the company. The income statement reflects acceptable profits for many years.

With the changes in golf clubs, you determine that you would like to update your manufacturing equipment and add a new product — putters. Your research indicates that these two activities will enhance the sales volume of your existing club lines and the putters will open doors to new customers adding both volume and profits. You are able to put together a pro forma of costs, sales and profits to support your recommendations and Dad says "Let's do it!" Your estimates indicate that you will need to purchase $500,000 worth of equipment and hire three new employees to make the putters.

Dad has always banked with ABC Bank, a local independent bank. He has personal and company deposit accounts with the bank. Additionally, the bank loaned Dad the funds to buy the building that houses the company. That building is worth $350,000 with a note balance of $100,000 on a long term mortgage that has always paid as agreed. The company has never borrowed other monies from the bank.

You schedule an initial meeting with the banker for a preliminary discussion of your plans and needs seeking his guidance on how to proceed.

Part 1 | Part 2 | Part 3 | Part 4

Please select PART TWO to continue with our unfolding story and training for Business Borrowing 101 ... From Your Banker' Point of View.

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About the author

Mr. Mike Sanders

Mr. Mike Sanders (USA)

Mr. Mike Sanders holds a BBA in Finance and an MBA. He is a licensed real estate broker and a 35+ year career banker.


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