Analysis of The Clarkson Lumber Company.

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BACKGROUND:

Mr. Clarkson, an energetic 49-year-old man, founded the Clarkson Lumber Company in 1981 as a partnership with his brother-in-law. In 1996, after rapid growth in its business, the Clarkson Lumber Company anticipated a further increase in sales. Despite good profits, the company had experienced a shortage of cash and had found it necessary to increase its current borrowing capacity ($399,000) from County National Bank in the spring of 1996. The maximum loan that County National would make to any one borrower was $400,000 and Clarkson had been able to stay within this limit only by relying heavily on trade credit. In addition, County National was now asking Mr. Clarkson to guarantee the loan personally. As a result of the Clarkson Lumber Company financial situation, a friend introduced Mr. Clarkson to the Northwestern National Bank. A much larger bank, Northwestern, would extend a line of credit to Clarkson Lumber up to a maximum amount of $750,000. Furthermore, it was cited that Northwestern would require restrictions on borrowing in excess of $750,000 to reduce loan risk. Mr. Clarkson thought a loan of this size would improve profitability by allowing him to take full advantage of trade discounts. When