Jones Electrical Distribution badly needs to secure a loan due to its rapidly growing business. Southern Bank & Trust needs to analyze the company to determine whether or not they should approve the loan. This case study gives students the opportunity to do financial forecasting, and ratio analysis, and recommend solutions based on the available alternatives.
Thomas R. Piper and Jeffrey DeVolder
Harvard Business Review (4179-PDF-ENG)
April 06, 2010
Case questions answered:
Case study questions answered in the first solution:
- Do you agree with Jones Electrical Distribution’s estimate of the company’s loan requirements? How much will the company need to borrow to finance its expected expansion in sales (assume 2007 sales of $2.7 million)?
- Should Ms. Montrose approve the loan?
- Which of the following options is best for Ms. Montrose?
• Extend the loan;
• Extend the loan, but modify the conditions (state the conditions you believe best for Southern Bank & Trust);
• Refuse the loan.
Case study questions answered in the second solution:
- What is Jones Electrical Distribution’s business? How well has it been performing? What must Jones do to succeed in the business?
- Why has this profitable company had to borrow more and more money from the bank?
- What drove the increase in Inventory and Accounts Receivable balances in 2005 and 2006?
- What drove the increase in accounts payable? Calculate the cost of trade credit. Should Jones take the trade discounts?
- Will a line of credit of $350,000 be sufficient for Jones to meet the company’s needs if the company takes trade discounts? Will it be enough if the company does not take the trade discounts?
- What will happen to Jones’ financial needs beyond 2007? What would have to occur for borrowing to decline?
- Do you think the banker, Ms. Montrose, should agree to lend Mr. Jones the money that he needs? What are the alternatives open to Mr. Jones if Ms. Montrose refuses his request for an increased credit line?
- Given your analysis of Jones Electrical Distribution, what are your recommendations to Mr. Jones about the financing of his business?
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Jones Electrical Distribution (Brief Case) Case Answers
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Overview: Jones Electrical Distribution
Nelson Jones founded Jones Electrical Distribution, a company that provides electric components to multiple contractors and electricians, in 1999. Due to his rapidly growing business, Jones wanted a bank that would be able to match the speed of his company.
Therefore, Southern Bank & Trust needs to analyze the distribution company to determine whether they should approve the loan, approve the loan, alter the conditions, or refuse the loan of $350,000. The bank will base its decision on risk, customer relations, and return on investment.
The first alternative is to extend the loan with the current conditions.
An advantage of this alternative is that Southern Bank and Trust could have a huge monetary gain from Jones Electrical Distribution’s projected total assets of $961,390 in 2007 (Appendix A). In addition, there is evidence of constant growth since 2004 in total assets (Appendix A).
Appendix A (in thousands)
Another advantage is that the loan could draw in potential customers as a public relations and marketing tool. The bank demonstrates its willingness to take risks and support a local, small business.
The final advantage is that the bank could strengthen customer relations with their current clients. Jon Lyons, a friend of Jones and a homebuilder, would be elated that the bank trusted his decision and recommendation. Therefore, this could result in Lyons’ company being willing to take more loans with Southern Bank and Trust and increase consumer loyalty.
However, a disadvantage to the first alternative is there is a risk that Jones Electrical Distribution could not repay the loan. The projected operating expenses in 2007 are $392,210, which is more than…
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