Secured Problem 1 - Structuring a Secured Loan Transaction

Marine Systems, Inc. is a retail seller of personal watercraft, which it manufactures from component parts.Marine Systems operates five stores in the Seattle area along with a separate manufacturing facility.It leases the premises for the stores and manufacturing facility.Its total inventory of watercraft and component parts has a wholesale value of $800,000, which Marine Systems sells at a 75% markup.Marine Systems also owns $150,000 in display cases, cash registers, tools, computers, and the like.

Marine Systems currently owes its various unsecured creditors approximately $500,000.After deducting its monthly payments to these creditors and overhead costs, Marine Systems nets $5000 per month.Marine Systems regularly sells watercraft to the City of Seattle and The University of Washington.Marine Systems invoices both purchasers with payment due within 30 days after delivery.Presently, each customer owes $25,000.

The job of a commercial attorney is to identify risks and propose ways to minimize them.Answer the following questions:

a.Marine Systems has asked Credit, Inc. for a $150,000 loan to expand its workforce.Credit, Inc. is inclined to make the loan but requests advice as to whether it should demand security.What do you advise?

1.What are the advantages of a secured credit transaction for the creditor?

2.Why would Marine Systems, the debtor, agree to a secured debt transaction?In other words, can Marine Systems benefit from the transaction?

3.What is Marine Systems' balance sheet (i.e., assets v. liabilities)

4.How big is the risk if the loan were unsecured?What is the worst case scenario?

5.If Marine Systems wanted an unsecured loan, would a higher interest rate compensate Credit Inc., for the risks?

b.If Credit, Inc. wants a security interest, what collateral would you recommend?There are risks associated with all of these categories of collateral.How will you protect the secured creditor from these risks?

1.Marine Systems' $5,000 monthly profit?

2.Inventory?

3. Equipment

4.Accounts Receivable?