Gilbert Lumber Company Analysis

Gilbert Lumber Company Analysis

Mengying Gong

March 8, 2019

1. Introduction

The main issues in this case was about the long-term debt financing of Gilbert Lumber company and the new banking relationship with the Khai National Bank. The Gilbert Lumber Company was seeking a more flexible financing method to meet its rapid sales growth and foreseeable needs. To obtain an unsecured line of credit for $465,000, Gilbert needs to sever its relationship with the Ferryn National Bank and accept the revolving secured 90-day note from Khai National Bank.

1. Problem statement

The Gilbert Lumber Company had experienced a shortage of cash due to its rapid growth in sales and increased notes payable. The maximum loan that Ferryn National Bank provided was $250,000, which was no longer enough to meet the needs of the company. It was necessary to look for a new banking relationship to increase its external borrowing and obtain a larger and unsecured loan.  

1. Environmental Analysis

The Gilbert Lumber Company was founded by Palmer Gilbert and his brother Hernandez Jones. In 2011, Gilbert purchased Jones’ interest and incorporated the business, and as a result, he has to make the payment of $105,000 to Jones. Most of the funds needed for this payment was collected by a loan of $70,000, with an interest rate of 11%. This loan needed to be secured by its fixed assets and was repayable in quarterly installments at the rate of $7,000 a year over the next ten years. In addition, the company’s sales were increasing rapidly every year, so its working capital was also increasing. Gilbert was seeking additional financing to cope with the shortage of cash arising from the purchase of Jones’ interest and the additional working capital due to the company’s increased sales.

The Ferryn National Bank only provided the maximum loan of $250,000 and required that the loan be secured by real property. In order to run the business, if the company continues to borrow money from the Ferryn National Bank, Gilbert has to increase its borrowing from the bank to $247,000, which was almost the maximum loan limit of the bank. Moreover, the interest expense was $10,000 in the first quarter of 2014.

The Khai National Bank extends a line of credit to the Gilbert Lumber up to a maximum amount of $465,000 with a lower interest rate of 10.5%. The higher credit limit and the flexibility of a line of credit gives ample room for the company to grow. A further benefit is that the loan is not secured with real property. However, there will be more restrictions on borrowing from this bank. The bank requires the company’s net working capital to be maintained at a certain level and the company’s additional investments in fixed assets requires the bank’s prior approval. There are limitations on withdrawals of funds from the business by Gilbert and restrictions on Gilbert’s ability to seek additional borrowing.