Obtaining Debt Capital Mini-Case: for Chapter 15 of Timmons, New Venture Creation (analysis of Whiz-Bang Industries)

This is a mini-case from an Entrepreneur Class. (** See attached file for full problem description **).


Obtaining Debt Capital Mini-Case
(for Chapter 15 of Timmons, New Venture Creation)

After graduation from the MBA program, you took a job at a small consulting firm specializing in providing management assistance to entrepreneurial ventures. One of your clients is Whiz-Bang Industries, a three-year-old firm that manufactures components for computer networks. The firm has been quite successful, and is growing at the rate of about 40 percent per year. As a result, the firm is in need of additional debt capital.

Two hours from now you have a meeting with the CEO and CFO of this firm. To review for this meeting, you need to answer the following questions. You begin by examining the balance sheet of Whiz-Bang Industries.

Assets (in thousands)
Cash 50
Accounts Receivable 200
Inventory 300
Equipment 600
Plant 1000
Total Assets 2150
Liabilities
Accounts Payable 250
Notes Payable 200
Taxes Payable 50
Long-Term Debt 1200
Equity
Common Equity 450
Total Liabilities & Equity 2150

1. What sources of debt capital are likely to be available to Whiz-Bang Industries?
2. Given Whiz-Bang’s balance sheet, how much money can they expect to borrow?
3. To what degree are the following financing sources likely to be available to Whiz-Bang Industries? What advantages and disadvantages do these financing sources have?
 Trade Credit
 Commercial Bank Financing
 Lines of Credit
 Accounts Receivable Financing
 Time-Sales Finance
 Unsecured Term Loans
 Chattel Mortgages and Equipment Loans
 Conditional Sales Contracts
 Plant Improvement Loans
 Commercial Finance Companies
 Factoring
 Leasing Companies
4. What advice can you provide Whiz-Bang on how to manage their banking relationship? How should Whiz-Bang choose a banker?
5. If Whiz-Bang is planning on obtaining a loan, what key steps will they have to go through?
6. What types of restrictions and covenants should Whiz-Bang watch out for?
7. What advice would you give Whiz-Bang if the bank denies its loan application?
8. What “tar pits” should Whiz-Bang beware of?

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