Question

Company MN is an Oklahoma City based regional distributor of pre-manufactured windows and doors targeting small to medium size homebuilders, remodelers, and commercial construction companies. The Company, incorporated as a Limited Liability Company (LLC), has been in business for just two years, but due to strong industry contacts, strong product quality representation, and competitive pricing has already achieved profitability in just its second year recording $250,000 in Net Income. The current annual budget in combination with the multi-year Financial Modeling forecasts a Net Income for the next two years of $600,000 and then $1.2 million, respectively.   The two Co-Founders each own 35%. A single local Angel investor, which initially invested $750,000 in a Series A Preferred owns the remaining 30% in Equity. Fortunately the Series A Preferred has a 0% Dividend Rate and therefore does not impose any “cash drain” on the Company enabling all profits to be retain to support future growth. Given the Company’s strong historic and forecasted continued strong revenue growth rate, the Company needs additional capital to support the correspondingly increasing finished inventory product levels and Accounts Receivable balances, which averages approximately 45 days outstanding. The financially annualized forecasted inventory and Accounts Receivable levels for the next year are $600,000 and 450,000 respectively. Fortunately, upon launching the startup the Co-Founders rented a then excessively large warehouse in anticipation of rapid growth. As a result, the current facility size is more than adequate and should even continue to remain so for hopefully the next three to four years. However, the capacity or utilization rate of the current two forklifts is excessive and has even contributed to unnecessary labor overtime in order to prepare incoming orders for shipment. Originally, the Company rented a couple of used forklifts which unfortunately have been prone to breakdown further compounding this problem. As a result, the Company would like to purchase a total of four newer forklifts, two replacements and two for unit growth, costing approximately $60,000 in aggregate.

Based upon the remaining and current cash liquidity associated with the original Series A Preferred equity investment, the company still has approximately $150,000 in cash liquidity today, leaving a need for approximately $600,000 in incremental capital infusion. Please help these Co-Founders by creating a Debt Capital funding plan. In this Debt Plan identify the Debt Source, the acceptable or required Collateral requirements, the estimated “costs or terms”, any large barriers/obstacles which ideally should be immediately evaluated, and a recommended itemized listing of required documents in anticipation or preparation of the corresponding Debt Application.   

(Please type in your recommended Debt Plan below.)

Answer 1

The company can raise money via 3 options - equity, debt and hybrid. In this case, the management has chosen the debt structure.

The recommended Debt Plan here would be one which will infuse quick capital into the company's coffers. However, there are 2 main problems which arise: being a new company, it does not have a sufficient backdrop or great market goodwill based on which the creditors will lend money and even if they do, they will charge a high amount of interest as return for risk undertaken. The company cannot afford to pay huge interests as that would drain the company's coffers and hinder its chances or possibilities to expand in the near future.Thus, the Debt plan should be such which allows for a moratorium period of payment which will allow the company to settle down and reduce chances of default. Also, the company must ensure that the interest rates payable are not exorbitant.