Jones Electrical

Memo Jones Electrical Distribution

Date: Spring 2007

To: Rachel Montrose, Relationship Officer

From: Thomas Harper; Travis Ham; Dorian Dolleman

Subject: Business Financing Through Southern Bank and Trust

Recommendation:

Jones is going to take the loan from Southern Bank and Trust because Jones needs more cash to help him pay off the companies liabilities and to help him with the companies flexibility. By taking this loan Jones will not be able to take the trade discount.

Jones Electrical Distribution is a profitable company that is looking to use a revolving line of credit to finance its new growth. The line of credit being requested has a maximum limit of $350,000. Jones’ main concern is the fact that it can pay its debt to suppliers with a 2% discount if paid within 10 days or it can pay them when they become due and forgo the 2% discount. If the 2% discount is taken, Jones will require 401,000 to fund their operations. If the 2% discount is not taken, they will only require 310,000 to completely fund its operations and this would allow the company to stay within its credit limit.

Description:

The ratio analysis in Exhibit 4 shows that Jones was taking the 2% discount because the days of payable for 2004 and 2005 was 10 days. However in 2006 it went to 24 days. This is when Jones was unable to meet its current payable requirements during the first 10-day period and thus had to forgo the 2% discount. While Jones was paying its bills on time, the days of sales outstanding were 42 days is 2004, 44 days in 2005 and 43 days in 2006. This means that Jones was making sure that the suppliers were getting their money in a timely matter, but neglecting to collect his own money at a similar rate. This is part of why Jones needs the new loan. The more money Jones pays out while not collecting an equal amount will cause Jones to need more money from the bank to keep driving the growth of his company.

The loan has an interest rate...