Week 2 Assignment - Decisions for Quarter One and Quarterly Business ReviewPart I: Decisions for Quarter One. Prior to working on your Decisions for Quarter One, review the following through the Growi
TO:General Manager
FROM:Ferris Futrell (Finance Manager)
Line of Credit
In response to your question about State Street Bank's method of determining our adjustable line of credit, I am providing a portion of the most recent bank letter from Loan Manager, Francine Friendly, on the subject.
“. . . Our analysis of your industry reveals consistent, modest growth during the past year with little fluctuation in price or terms.
After discussions with your parent company regarding the prior quarter’s performance and your company’s increased cash needs to align with potential industry growth, we are pleased to extend your credit line to a minimum of $425,000. We will continue to review your position and adjust your credit line every quarter, as we do with all new companies. Your credit line will increase as your company grows, but it will not go below $425,000. In each quarterly review, we will allow:
1. $100,000 for personal collateral now held;
2. Sixty percent of Accounts Receivable;
3. Thirty percent of the value of all finished goods inventories.
Your total line of credit will be either the sum of the above or $425,000, whichever is greater.
An interest rate of 15% per annum (3.75% per quarter) will be charged on money borrowed. Borrowing up to the limit of the credit line will be automatic. As cash is received, repayment will also be automatic. In any quarter, interest will be charged based upon the outstanding loan amount (i.e., your negative cash balance) at the end of the previous quarter. You may, therefore, borrow automatically against your credit line during any quarter, and you will pay no interest until the following quarter. We will inform you of any changes in our policies or interest rates.
When a line of credit is exceeded, dependent upon the severity of the overdraft and the company plan to remediate the issue, the bank will determine the appropriate actions. In the quarter following the overdraw, the current rate of interest will be charged on money borrowed up to the credit line; a loan restructuring fee of $3,500 will be charged, and an interest rate of 21% per annum may be charged at the bank’s discretion on money borrowed in excess of the credit line. If such an incident should occur, the bank and the company will make every effort to resolve the overdraw condition immediately. Should that not happen and should a successive overdraw occur, the bank may invoke additional remedial steps.”
I hope this clarifies any questions you have on the terms of the line of credit. Please note that exceeding the credit line is not acceptable operating procedure. I recognize that certain negative business conditions may be unforeseen, but for the most part, I would recommend appropriate sensitivity analysis to avoid an overdraft situation.
