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Case study — Ray Murdoch and Steve Brown – Commercial Equipment Finance Background You have just met with Ray Murdoch and Steve Brown, referred to you by another commercial client. Ray Murdoch and Steve Brown jointly own a successful and growing business that manufactures metal pallets. They trade under the name Pallets-R-Us Pty Ltd. The pallets are manufactured using material that is lightweight and durable. There has also been a very structured approach to the research

Case study — Ray Murdoch and Steve Brown – Commercial Equipment Finance
Background
You have just met with Ray Murdoch and Steve Brown, referred to you by another commercial client.
Ray Murdoch and Steve Brown jointly own a successful and growing business that manufactures metal pallets. They trade under the name Pallets-R-Us Pty Ltd. The pallets are manufactured using material that is lightweight and durable. There has also been a very structured approach to the research and development for the engineering and design of the pallets. The pallets are used in all industry sectors. Part of the process involves powder coating the finished product, which is currently outsourced to a local well-established contractor.
It is critical that Ray and Steve’s product meets market needs. They need to maintain sustainable production and operating costs if they are to forecast their sales and cost of sales.
They have a well-established client database that provides them with repeat ‘business-to-business’ dealings. While they have only been trading for 30 months, they have a solid business plan with written supply contracts with three major business clients and several smaller business clients.
Ray and Steve now require finance to assist them with the purchase of a sophisticated machine that uses the technical platform system CNC. This machine can be programmed to rapidly fabricate multiple components. The machine has an expected commercial lifespan of at least 15 years with operating software to be updated every three years. This software and upgrades is included in the purchase price of $800,000. They will have to import the machine from the US. Initial enquiries with the US supplier have indicated that they will require a letter of credit for the import of the machine. Once the machine has arrived and installed on the premises the letter of credit will be replaced with an asset lease. The asset lease requested by the borrowers will be for a seven-year term with a residual of 15%.
Their business employs five people and, with the expected increase in business through the automation of production, they have forecast that they will need to recruit an additional two staff members in the next 3–6 months to meet sales/production demands.
Ray has been in the metal fabrication field all his working life. He has an MBA and understands financial management. He also has solid engineering skills and developed the majority of the design works for the business. He is divorced and has no dependants. Steve is married and his wife is a school teacher and she will be retiring at the end of the year.
Steve worked with Ray at ‘Protech’ as a foreman. His skills are in production and managing project/job flow. He has high level technical skills and can complete works to specification at a high standard.
Steve and Ray have provided the last two years financial accounts for the trading business, as well as interim accounts for the current financial year. Ray’s brother provided business with a loan $500,000 when the business commenced and he is being repaid interest plus a principle repayment of $30,000 per annum.

Applicant information
Client Ray Murdoch Steve Brown
Current address: Unit 43, 25 High St Northville, <Your State> and has lived there for six years 23 Desmond Lane Northville, <Your State> and has lived there with Kate for seven years. They own property jointly.
Home phone: 9001 2121 9002 1212
Status Ray is divorced with no dependent age children Steve is married with no dependents
Employment Self-employed business owner Self-employed business owner
Income $100,000 per annum $100,000
Property value $750,000 $900,000
Cash at bank $12,500 $9,600
Contents $100,000 $85,000
Superannuation $250,000 Steve $350,000, Kate $60,000
Motor vehicle $40,000 $55,000
Home loan $250,000 repayments $2,068p.m., P & I, 18 years remaining $350,000 repayments $2,645 p.m., P & I, 22 years remaining
Credit card $25,000 limit with debt of $15,000, monthly payment calculated @3% of limit $10,000 limit with debt of $3,000, monthly payment calculated @3% of limit
Car loan $0 $15,000 repayment $746p.m., remaining term 4 years

The business
Year 1 net profit after tax $200,000
Year 2 net profit after tax $220,000
Current year interim profit (10 months trading) $200,000
Wages to partner 1 – years 1 and 2 $100,000
Wages to partner 2 – years 1 and 2 $100,000
Principal repayment to Ray’s brother repaid annually $30,000
ABN: 64-123-123-123
Business name: Pallets-R-Us Pty Ltd
Key balance sheet items
Cash $25,000
Trade Debtors $220,000
Trade Creditors $100,000

Notes The business currently meets all creditor payments at 30-day terms.
Debtor collection has been solid. They invoice an upfront payment of 50% of the sale price, which assists in funding their production.
They have orders of $1m over the next 3 months and have made an increase in their gross profit margin.
The orders are from several clients, so their debtors will be well spread.
Outstanding balance on loan from brother $440,000.

Task 1a — Identify the clients’ complex broking needs
Prepare a list of questions that you would need to ask Ray and Steve about their history, experience, business performance and the intended equipment purchase.
In preparing your list of questions you should ensure that you cover the following:
•the complex features in importing and purchasing this equipment and benefits that will come to the Company from such purchase
•the identification of potential risks in such a transaction and Ray’s and Steve’s tolerance of risk
•the financial aspects of the transaction and current financial position of the business

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