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)
Accounts Receivable 200
Total Assets 2150
Accounts Payable 250
Notes Payable 200
Taxes Payable 50
Long-Term Debt 1200
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?
Commercial Bank Financing
Lines of Credit
Accounts Receivable Financing
Unsecured Term Loans
Chattel Mortgages and Equipment Loans
Conditional Sales Contracts
Plant Improvement Loans
Commercial Finance 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?