Sorenson Stove Company Case Summary
This amount would cover the projected maximum shortfall of $4,198,000 in August. With a credit line of $5,000,000 there is a possible commitment fee of $416,500. In order to avoid commitment fees it is recommended that Sorenson Stove Company switch to revolving asset based loan method of financing. This type of financing allows for changes in the borrowing amount to compensate for fluctuations in required capital. “A [revolving asset based loan] allows the borrower to borrow, repay, and reborrow as needed over the life of the loan facility.” (ABL guide cite) This is especially important for Sorenson Stove Company because they have large fluctuations in financing requirements on a daily basis. The ability to increase or decrease the loan amount daily would be very beneficial in cutting financing costs for the company.
Revolving asset based loans use current assets, such as accounts receivables, as collateral for the loan. (ABL cite) This method of financing would not require a minimum required cash balance. Eliminating a minimum required cash balance will allow for the company to borrow less and, therefore, save money on interest