Background

You have just met with Ray Murdoch and Steve Brown, referred to you by another commercial client.

Ray Murdoch and Steve Brown jointly own a successful and growing business that manufactures metal pallets. They trade under the name Pallets-R-Us Pty Ltd. The pallets are manufactured using material that is lightweight and durable. There has also been a very structured approach to the research and development for the engineering and design of the pallets. The pallets are used in all industry sectors. Part of the process involves powder coating the finished product, which is currently outsourced to a local well-established contractor.

It is critical that Ray and Steve's product meets market needs. They need to maintain sustainable production and operating costs if they are to forecast their sales and cost of sales.

They have a well-established client database that provides them with repeat 'business-to-business' dealings. While they have only been trading for 30 months, they have a solid business plan with written supply contracts with three major business clients and several smaller business clients.

Ray and Steve now require finance to assist them with the purchase of a sophisticated machine, using the technical platform system CNC. This machine can be programmed to rapidly fabricate multiple components. The machine has an expected commercial lifespan of at least 15 years with operating software to be updated every three years. This software and upgrades is included in the purchase price of $800,000.They need to import the machine from the US. Initial enquiries with the US supplier have indicated that they will require a letter of credit for the import of the machine.

Their business employs five people and, with the expected increase in business through the automation ofproduction, they have forecast that they will need to recruit an additional two staff members in the next 3-6 months to meet sales/production demands.

Ray has been in the metal fabrication field all his working life. He has an MBA and understands financial management. He also has solid engineering skills and developed the majority of the design works for the business. He is married and has no dependants. His wife is a school teacher and she will be retiring at the end of the year.

Steve worked with Ray at 'Protech' as a foreman. His skills are in production and managing project/job flow. He has high level technical skills and can complete works to specification at a high standard.

Steve and Ray have provided the last two years financial accounts for the trading business, as well as interim accounts for the current financial year. Ray's brother provided business with a loan $500,000 when the business commenced and he is being repaid interest plus a principle repayment of $30,000 per annum.

Applicant information

Client

Ray Murdoch

Steve Brown

Current address:

Unit 43, 25 High St Northville, and has lived there for six years

23 Desmond Lane Northville, and has lived there with Kate for seven years. They own property jointly.

Home phone:

9001 2121

9002 1212

Status

Ray is divorced with no dependent age children

Steve is married with no dependents

Employment

Self-employed business owner

Self-employed business owner

Income

$100,000 per annum

$100,000

Property value

$750,000

$900,000

Cash at bank

$12,500

$9,600

Contents

$100,000

$85,000

Superannuation

$250,000

Steve $350,000, Kate $60,000

Motor vehicle

$40,000

$55,000

Home loan

$250,000 repayments $2,068p.m., P & I, 18 years remaining

$350,000 repayments $2,645 p.m., P & I, 22 years remaining

Credit card

$25,000 limit with debt of $15,000 payment @3%

$10,000 limit with debt of $3,000 payment @3%

Car loan

$0

$15,000 repayment $746p.m., remaining term 4 years

The business

Year 1 net profit after tax

$200,000

Year 2 net profit after tax

$220,000

Current year interim profit (10 months trading)

$200,000

Wages to partner 1 - years 1 and 2

$100,000

Wages to partner 2 - years 1 and 2

$100,000

Principal repayment to Ray's brother repaid annually

$30,000

Key balance sheet items

Cash

$25,000

Debtors

$220,000

Creditors

$100,000

Notes

The business currently meets all creditor payments at 30-day terms.

Debtor collection has been solid. They invoice an upfront payment of 50% of the sale price, which assists in funding their production.

They have orders of $1m over the next 3 months and have made an increase in their gross profit margin.

The orders are from several clients, so their debtors will be well spread.

Task 2a Develop complex broking options

You are required to a full report addressed to Ray and Steve outlining available loan options; the process and the risks (potentialand real) of which they should be made aware.

In a suitable report format you should cover the following:

1.the parties to the loan

2.outline the type of letter of credit (LC) likely to be used, the parties to the LC and the high-level steps involved in setting up and establishing LC to enable import of the equipment

3.the product options that are available to finance an equipment purchase once it has arrived in Australia

4.your recommendation of best product option, including amount, security/collateral, term, potential interest rate and residual value (if any)

5.name three (3) lenders that would consider and potentially approve this transaction and advise Ray and Steve about product type, loan term, interest rate, balloon payment (if applicable) and monthly repayment they offer

6.the procedure to commence the import of the equipment and the loan, including documentation Ray and Steve need to provide

7.the client responsibilities, so Steve and Ray fully understand the facility being proposed

8.outline the risks (potential and real) of which Ray and Steve should be made aware

9.whether personal guarantee will be required from the Director's spouse

10.a summary of all fees and charges including those for setup and those of the lender

11.advise which relevant disclosures need to be made

12.a request for client to inform you of any questions about the transaction and/or provide an instruction to proceed.Task 2a Develop complex broking options

You are required to a full report addressed to Ray and Steve outlining available loan options; the process and the risks (potentialand real) of which they should be made aware.

In a suitable report format you should cover the following:

1.the parties to the loan

2.outline the type of letter of credit (LC) likely to be used, the parties to the LC and the high-level steps involved in setting up and establishing LC to enable import of the equipment

3.the product options that are available to finance an equipment purchase once it has arrived in Australia

4.your recommendation of best product option, including amount, security/collateral, term, potential interest rate and residual value (if any)

5.name three (3) lenders that would consider and potentially approve this transaction and advise Ray and Steve about product type, loan term, interest rate, balloon payment (if applicable) and monthly repayment they offer

6.the procedure to commence the import of the equipment and the loan, including documentation Ray and Steve need to provide

7.the client responsibilities, so Steve and Ray fully understand the facility being proposed

8.outline the risks (potential and real) of which Ray and Steve should be made aware

9.whether personal guarantee will be required from the Director's spouse

10.a summary of all fees and charges including those for setup and those of the lender

11.advise which relevant disclosures need to be made

12.a request for client to inform you of any questions about the transaction and/or provide an instruction to proceed.

Task 3a Implement complex loan structures

Ray and Steve have accepted your recommendations and have given you authority to proceed with their application.

As part of implementing their loan application you are required to a formal written loan submission to the lender for pre-approval. Your loan submission must include the following:

details of borrower, guarantors and all contact details

borrowers background

an overview of the proposal what the finance is for

the proposed structure of the facility being recommended product type, deposit amount (if required), loan amount, term, interest rate and residual value (if any)

full details of the security/collateral that is to be provided

serviceability calculations including Debt Service Cover Ratio (DSCR) calculations, including all personal borrowing facilities of the directors

provide a 'funds-to-complete' table including statutory costs and any relevant fees

highlight the relevant risks industry, business, transactional and how they are mitigated

any other information that is relevant to assist the lender provide an approval

your comments and recommendations

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