Lease or Borrow: Funding a Jute-Bag Workshop
Two graduates plan a jute-bag workshop in Jashore. Machinery costs BDT 350,000, or can be leased for BDT 9,000 per month with no purchase. Initial raw material is BDT 120,000, the premises deposit is BDT 60,000 (refundable) and registration is BDT 15,000. They have BDT 300,000 of savings. A bank offers BDT 250,000 at 10% a year, repayable in 24 equal monthly instalments of about BDT 11,540, against a personal guarantee. They expect to sell 1,500 bags a month at BDT 125; variable cost is BDT 72 and fixed costs are BDT 55,000 a month, excluding any lease or loan payment. Two wholesalers, who would take 60% of output on 45-day credit, have given verbal interest only.
1. Compute the funds needed at start-up, including the receivables gap, and compare with the funds available. Show the monthly position.
Read the worked answer
Start-up cash out: 350,000 + 120,000 + 60,000 + 15,000 = BDT 545,000. Available: 300,000 savings + 250,000 loan = BDT 550,000 - a cushion of BDT 5,000.
Receivables gap: monthly sales = 1,500 × 125 = BDT 187,500; credit sales = 60% = BDT 112,500 a month, collected after 45 days, so about 1.5 months is permanently outstanding: BDT 168,750. Wages, materials and rent are paid monthly.
Total requirement ≈ 545,000 + 168,750 = BDT 713,750 against 550,000 available - a shortfall of roughly BDT 164,000.
Monthly position: 187,500 − 108,000 (variable) − 55,000 (fixed) = BDT 24,500 profit; less the loan instalment of 11,540 leaves BDT 12,960. That is too thin to absorb a single late payer, so the plan as written does not fund itself.
2. Would you advise buying the machinery with the bank loan or leasing it? Justify with figures.
Read the worked answer
Lease. Buying ties BDT 350,000 of the scarcest resource - cash - into an asset the lease supplies for BDT 9,000 a month.
With the lease: start-up = 120,000 + 60,000 + 15,000 = BDT 195,000, leaving BDT 105,000 of savings for working capital. Monthly profit = 24,500 − 9,000 = BDT 15,500, with no BDT 11,540 instalment and no personal guarantee. Total requirement = 195,000 + 168,750 = BDT 363,750, a gap of about BDT 64,000 - met by a small overdraft rather than a BDT 250,000 term loan.
Better still, negotiate 30-day terms with the wholesalers: the gap falls to 112,500, and 195,000 + 112,500 = BDT 307,500, roughly covered by savings with the deposit as buffer.
Buying is justified only if volume is contractually secured well above the instalment with margin to spare. It is not.
3. Identify the most fragile assumption in the plan and recommend actions to protect against it.
Read the worked answer
The weakest link is 45-day credit from two wholesalers who have given only verbal interest. If they pay on day 75 instead of day 45, receivables rise by another month of credit sales - about BDT 112,500 - and the funding gap roughly doubles. If one wholesaler withdraws, 30% of sales vanishes while BDT 55,000 of fixed costs still falls due.
Actions before drawing any money:
- written purchase orders stating quantity, price and payment date;
- 30-day terms, or a 2% discount for payment within 15 days;
- a 13-week rolling cash forecast updated weekly, with a minimum cash floor;
- treat the refundable BDT 60,000 deposit as a recoverable reserve, not as money available for machinery;
- a monthly break-even check against the fixed cost and any lease payment.
Without written orders, the loan turns a demand risk into a personal-guarantee risk.