New Account Request from a Fast-Growing Fabricator
Northline Fabrication LLC, a three-year-old metal fabricator, has applied for a $450,000 open credit line on net 45 terms. Its application shows $6.2 million in annual revenue, 14% gross margin, $85,000 net income, and $310,000 tangible net worth. The current ratio is 1.12 and the quick ratio 0.58. A $750,000 bank line is fully drawn and secured by all assets. The owner declined to provide a personal guarantee, saying the LLC is debt-free except for the bank. Trade references: one five-year supplier reports a $200,000 high credit and payments 10 days slow; a second reports $80,000 and 30 days slow; a third did not respond. The commercial credit report shows an active $18,000 state tax lien, no judgments or bankruptcy, and one UCC filing by the bank. Your policy caps unsecured exposure at the lesser of 10% of tangible net worth or 5% of verified annual purchases; when tangible net worth is below $500,000, unsecured exposure above $50,000 requires a personal guarantee and a perfected security interest. Sales calls the account strategic.
1. Apply the policy and determine the maximum unsecured limit Northline qualifies for. Show the calculation and explain any policy exception.
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Policy math: 10% × $310,000 tangible net worth = $31,000. The 5% purchase test cannot be verified because no purchase volume was supplied; even if verified purchases were $6.2 million, 5% = $310,000, so the net-worth test binds at $31,000. The $50,000 cap applies only to unsecured exposure above $50,000 requiring a PG and security interest; it does not raise the limit. Therefore the maximum unsecured limit is $31,000, not $450,000. Any larger exposure needs a policy exception approved by the credit committee, a personal guarantee, and a perfected security interest. Even then, the bank's all-asset lien means the new security interest would be junior unless the bank subordinates or the company uses a purchase-money structure. The active tax lien also requires payoff or subordination. Sales' strategic label is not a credit substitute.
2. Assess the credit risk and the quality of the investigation. What gaps must be closed before a final decision?
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Risk is high: quick ratio 0.58, current ratio 1.12, thin tangible net worth, fully drawn bank line, active tax lien, slow trade payments, and one missing reference. The investigation is incomplete. Close these gaps: obtain CPA-prepared or reviewed financials for three years and interim statements; verify accounts payable and debt schedules; get bank statements and lender confirmation; obtain a current UCC and tax-lien search; verify purchase volume from references or invoices; obtain owner personal financial statement and credit report; confirm the tax lien payoff status; and identify customer concentration and backlog. The refusal to provide a personal guarantee is a behavioral red flag. A site visit and a call to the bank's loan officer are also warranted. Do not treat the missing third reference as neutral; it is an unresolved data point.
3. Recommend a credit structure and terms that balance sales opportunity and downside protection. Explain why each element is appropriate.
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Recommended structure: approve $31,000 unsecured for 90 days, with a review at 60 days and a requirement that the first three invoices be paid within terms. For the requested $450,000, offer a path: $150,000 secured by a personal guarantee plus a UCC-1 on non-bank collateral, subject to a written intercreditor or subordination from the bank; the remaining exposure on COD or standby letter of credit. Require the tax lien to be paid or subordinated and the bank line to have availability. Set a 30-day cleanup period and a hard stop if any invoice goes 15 days past due. This balances the sales relationship with downside protection: the customer gets room to perform, but the supplier is not funding an undercapitalized, fully leveraged borrower on an unsecured basis. If the owner refuses all conditions, decline the $450,000 request.