TechGear Corporation: Debt Financing Alternative

The Situation Mark Anderson, a second$-$year associate at Horizon Capital Advisors $($HCA$),$ received a $1$:$00$ pm phone call from his supervisor, Laura Bennett. The issue at hand involved a new client, TechGear Equipment Corporation $($TechGear$),$ operating in the highly competitive industrial equipment manufacturing sector. TechGear had experienced continued revenue growth, reaching $$3$ million in gross sales in $2023.$ However, the company also found itself in a dangerous position, facing urgent financing requirements and cash generation challenges from increasing operational demands.

Warren Foster, TechGear's owner, provided additional details regarding the company's current cash conversion cycle. Despite extending a generous net $40-$day payment term to customers, TechGear$$s average accounts receivable days had been climbing and had now reached $48$ days. TechGear traditionally settled supplier invoices within $10$ days to capitalize on the $2/10,$ net $30$ terms, securing a $2\%$ discount. Furthermore, inventory days were at $68$ days mainly because the company had recently faced a setback with the departure of key sales personnel, leading to a build$-$up of stagnant inventory.

When Mark analyzed the TechGear$$s situation, he found that this

company operated on slim profit margins, as low as $4\%,$ a result of its limited pricing power in the highly competitive market.TechGear$$s

urgent need for additional funding became apparent to Mark when he

noticed that the existing bank loan had been maxed out in $2023,$ leaving day$-$to$-$day operations hanging in the balance.

Adding another layer of complexity was TechGear's long$-$term debt, which had $$600,000$ outstanding with annual repayments of $$50,000$ and a $10\%$ interest rate. The current debt covenant mandated a minimum EBITDA ratio of $2$ times the interest expense. With the upcoming financing needs in $2024,$ TechGear is facing a delicate balancing act$-$seeking additional funds while minimizing interest expenses to reduce the risk of breaching the covenant.

Laura Bennett entrusted Mark with the task of evaluating available debt financing options for TechGear and providing recommendation. The choices, each with its own set of pros and cons, included a credit line with a commitment fee, application for a second term loan from the existing bank requiring compensating balances, and issuance of commercial paper with subsequent reissues in the short term. As

TechGear continues to borrow from Pacific Horizon Bank, the company faces a strategic challenge of finding a debt solution that minimizes interest expenses, allows flexibility in the EBITDA ratio, and

provides sufficient financing for TechGear$$s operations. Mark's recommendation is crucial for guiding TechGear through this complex

financial environment.

Anderson$$s Deliverable

Tomorrow morning, Anderson needs to explain his findings to Bennet and provide a draft of the presentation. He had several considerations to weight regarding the content of his communication and any additional materials to include. Bennet had requested a two$-$page

executive summary and a PowerPoint deck. She also provided Anderson with specific guidance,outlining the key expectations for him to address in his deliverables:

$1.$

Please determine potential solutions to address the current inefficiencies with regards to working capital management for TechGear; how can the firm optimize its management practices on:

a$)$Accounts Receivable

b$)$Inventory

c$)$Accounts Payable