Clarkson Lumber Case

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Loan Purpose and Request

The Clarkson Lumber Company (hereinafter referred to as “the Company” or “Clarkson”) currently requires a revolving credit facility in order to refinance an existing loan commitment of $399,000 with Suburban National Bank, fund its weak working capital program, and finance its growth.

The Company is requesting a $1,000,000 uncollateralized 2-year revolving credit facility at 10% fixed interest with financial covenants against the coverage and leverage levels of the Company.

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Customer Relationship

Keith Clarkson, the sole owner and president of the Company, was recently introduced to us as a potential client through a friend of his. He is currently a customer of the Suburban National Bank, where the maximum loan that any one borrower can take out is $400,000. Even though the Company has been able to stay under this threshold by relying heavily on trade credit, Mr. Clarkson believes that it is necessary to increase borrowings because of the Company’s cash shortage. Furthermore, Suburban National Bank is now asking Mr. Clarkson to guarantee the loan personally, thus Mr. Clarkson is seeking a new banking relationship where he can negotiate a larger loan that does not require a personal guarantee. Judging from his relationship with Suburban National Bank, Mr. Clarkson appears to be a loyal customer who is only seeking a new bank because the old one can no longer suffice his financial needs. While Mr. Clarkson has been a loyal customer, the quality of his company’s balance sheet has deteriorated recently and this has prompted the bank to ask for a personal guarantee in exchange for extending a bigger line of credit. Northrup National Bank should still treat this potential customer relationship carefully as there is always the possibility that Mr. Clarkson will find a new bank should he deem...