Case Study – Borrowing Enhancement Scenario

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Borrowing Enhancement Scenario

Client: Emission Testing Equipment Manufacturer
Topic: Borrowing Enhancement Scenario

Situation

Medium-sized company experiencing tremendous growth opportunities, especially from international markets. Growth was being internally funded and was beginning to limit their opportunities.

Operating Facts

Annual Sales: $20 million (50% from export sales), Average Accounts receivable: $3 million, Gross Margin: 40%, Account Turns Per Year: 7, Credit Function Handled By Corporate Controller.

Objective

Credit risk was not an issue – the prospect was interested in leveraging assets within a borrowing arrangement, freeing up capital so they could maximize all selling opportunities, both domestic and international.

Solution

Implement a domestic and export credit insurance program that eliminated all credit risk for both the prospect and lender.

Total Cost of Credit Insurance Programs: $50,000

Results

Credit insurance transformed pledged accounts receivable into “riskless” assets for the lender, allowing an increase in advance rates, the inclusion of prior excluded receivables in the formula, and also the ability to borrow against export open credit invoices. In total, both programs were projected to free up approximately $1 million in additional capital for our client.

Additional Capital

Average Receivables: $3 million
Allowed Receivables: $1.2 million
Prior Advance Rate: 80% (domestic sales only)
Available Capital: $960,00
New Allowed Receivables: $2.5 Million
New Domestic Advance Rate: 90%
Export Advance Rate: 70%
New Available Capital: $2 million

Cost Benefit Analysis

Additional Capital Provided: $1,040,000
Funds Employed Back Into Business at: 40% Gross Margin
Additional Opportunity: $416,000
By Account Turns Per Year: 7
Potential Incremental Return: $2.9 million