Larger Working Capital Credit Facility to Fund New Sales Orders
Enterprise– Global Hardwoods Lumber Distributor
Background : 55-year old family owned company is experiencing strong sales growth opportunities from current and new customers, particularly from international markets. Prior growth was internally funded supplemented by a bank line of credit, both of which were limits on new customer orders. The current lender did not include international A/R in borrowing base.
Financial Facts : Annual Sales - $38 million (30% international, which would grow to 65% with pending orders). A/R Average - $4.5 million. A/R Turns – 8.4 times. Gross Margin – 14%. Credit function handled by Sales/Shipping Staff.
Objective : In addition to covering explosive export sales growth, the company was interested in leveraging their A/R assets better within a larger borrowing facility. This would free up precious capital, maximizing their strong international sales opportunities within prudent credit guidelines.
Solution : World Trade Consult, LLC structured a domestic and international trade credit insurance protection plan that provided Named Buyer coverage on all new international customers, in addition to the company's domestic customers.
Outcome : Policy was assigned to lender who included International A/R in borrowing base, increased the borrowing advance rate to the company, making an additional $1.6 million available to fund sales growth (without shareholders having to inject additional capital into their company).
Additional Working Capital Debt Calculation
|Average A/R||$4.5 million|
|Prior Allowed A/R (Domestic only)||$1.6 million|
|Prior Advance Rate||75% (Domestic only)|
|Availability from Bank||$1.2 million|
|New Eligible A/R Borrowing Base||$4 million|
|New International A/R Advance Rate||75%|
|New Domestic A/R Advance Rate||85%|
|New Available Bank Debt||$3.15 million|
Review of Benefit and Cost
|Additional Working Capital Provided by Bank||$1,950,000|
|Additional Gross Profit to Company||$273,000|
|A/R Turns||8.4 times|
|Possible Increase in Annual Profit for Company||$2,293,200|
|Total Annual Premium - Trade Credit Insurance||$97,400|