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Background:
A Company needs $3mm until the 6th quarter from today (a break even point).
The Company is considering two loan options:
- Amortized with a short grace period (Loan 1)
- Amortized with a long grace period (Loan 2)
Tip:
When a Company is shopping for a loan, the first step is to clearly understand its financial needs. For instance, are $3mm required in day one or over the course of 3 quarters (i.e. to cover a dip in future cash flow?)
Loan1 - Amortized- Structure: 3 month grace + 33 monthly payments
- Equity Kicker: 0.4% of company’s equity per $1mm loan
- Interest: 10%
- With given structure, in order to have $3mm in Q6, the company must loan $5.5mm today
Loan2 - Long Grace- Structure: 18 month grace + 18 monthly payments
- Equity Kicker: 0.5% of company’s equity per $1mm loan
- Interest: 10%
- With given structure, in order to have $3mm in Q6, the company must loan $3mm today
| Loan 1 |
q1 |
q2 |
q3 |
q4 |
q5 |
q6 |
q7 |
q8 |
q9 |
q10 |
q11 |
q12 |
| Loan Available
| 5,500 |
5,000 |
4,500 |
4,000 |
3,500 |
3,000 |
2,500 |
2,000 |
1,500 |
1,000 |
500 |
0 |
| Interest & Fees |
138 |
131 |
113 |
106 |
94 |
81 |
69 |
56 |
44 |
31 |
19 |
6 |
| Loan 2 |
|
| Loan Available |
3,000 |
3,000 |
3,000 |
3,000 |
3,000 |
3,000 |
2,500 |
2,000 |
1,500 |
1,000 |
500 |
0 |
| Interest & Fees |
75 |
75 |
75 |
75 |
75 |
75 |
69 |
56 |
44 |
31 |
19 |
6 |
Result: Loan 1
Initial Amount Needed: $5.5mm
Equity: 2.2%
Interest: $888k
Loan 1 requires the Company takes out an unnecessarily large loan
Result: Loan 2
Initial Amount Needed: $3mm
Equity: 1.5%
Interest: $675k
Loan 2 offers a less expensive alternative and is a superior option
Simplistic Structure Provides Expensive Facility to Unsuspecting Borrowers
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