BANK LINE OF CREDIT TO SUPPORT LARGE PROJECT ROLL OUT

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Background and challenge

Company secured a large project. Most of the project was planned to be manufactured in China, then shipped to USA and assembled locally, then to be delivered to hundreds of locations.

The company had the option to manufacture locally at a much greater cost while shrinking its gross profit.

The projects was plan to span over 4 months, first shipment was due within three months and last shipment was scheduled for 4 months afterwards.

After delivery, each shipment had to go through a few weeks process of inspection and approval for payment by the customer.

Customer’s payment terms were 60 days, though often times these terms were stretched to 90 days and more.

Payment terms with Chinese manufacturer were essentially 50% on order and 50% before vendor ships the order. Vendor would had not ship without full payment.

 

Analysis

The company had to move very fast, to place orders in China, to wait a few weeks for raw material, start production and finish first shipment in time to allow the time needed for transportation from China as well as local assembly and transportation.

Payment terms with client, and, on the other end, with vendor, coupled with aggressive project schedule, effectively meant that the company would fund production for potentially 7-9 months on average.

The company did not have the required cash for this – $4M in this case.

 

Solutions

Company had to “attack” on two fronts, in order to be able to deliver the project:

 

1. Payment Terms improvement –

a. Company negotiated with customer 2% discount for payments within 15 days.

b. Company negotiated with vendor improved terms, allowing 35% of the cost to be paid only 30 days after the arrival of the inventory to USA.

 

2. Bank Line of Credit – although the company had never used a line of credit prior to this project, the company was able to secure a non-secured line of credit. We were able to create a business plan, including previous financial results and projection. We presented a solid case and were able to shop between three different banks and secure $4M of line of credit. As projected, the line of credit was indeed almost fully used in one point and subsequently paid off with the completion of the project.

 

Results

The company was able to deliver successfully $8M+ project at very healthy margins while  establishing good experience and reputation with the customer as well as the lending bank.