Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 18 Lending to Business Firms To explore how bankers can respond to a business customer seeking a loan and to reveal the factors bankers must consider in evaluating a business loan request. For most banks, business loans rank among the most important loans made. Therefore, any discussion of the methods and procedures used in granting different kinds of bank loans must begin with a discussion of commercial lending.

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Short Term Business Loans Self-Liquidating Inventory Loans Working Capital Loans Interim Construction Loans Security Dealer Financing Retailer Financing Asset-Based Financing

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Syndicated Loans A Loan or Line of Credit Extended to a Business Firm By a Group of Lenders in Order to Reduce the Risk Exposure to Any One Lending Institution

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Long Term Business Loans Term Loans Revolving Credit Lines Project Loans Loans to Support Acquisitions of Other Business Firms

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Sources of Repayment for Business Loans The Borrower’s Profits or Cash Flows Business Assets Pledged as Collateral Strong Balance Sheet With Ample Marketable Assets and Net Worth Guarantees Given By Businesses

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing Business Loan Applications Common Size Ratios of Customer Over Time Financial Ratio Analysis of Customer’s Financial Statements Current and Pro Forma Sources and Uses of Funds Statement

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Ratio Analysis Control Over Expenses Operating Efficiency Marketability of Product or Service Coverage Ratios: Measuring Adequacy of Earnings Liquidity Indicators for Business Customers Profitability Indicators The Financial Leverage Factor as a Barometer of a Business firm’s Capital Structure

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Control Over Expenses Wages and Salaries/Net Sales Overhead Expenses/Net Sales Depreciation Expenses/Net Sales Interest Expense on Borrowed Funds/Net Sales Cost of Goods Sold/Net Sales Selling, Administrative and Other Expenses/Net Sales Taxes/Net Sales

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Operating Efficiency Costs of Goods Sold/AverageInventory Net Sales/Total Assets Net Sales/Fixed Assets Net Sales/Accounts Receivables Accounts Receivables/(Net Sales/360)

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Marketability of Product or Service (Net Sales – Cost of Goods Sold)/Net Sales Net Income After Taxes/Net Sales

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Coverage Income Before Interest and Taxes Interest Payments Income Before Interest and Taxes Interest Pay. + Princ. Pay/(1-Marg.Tax) Income Before Interest, Taxes and Lease Payments Interest Payments + Lease Payments

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Liquidity Current Assets Current Liabilities Current Assets – Inventory Current Liabilities Current Assets – Inventory (raw) –Current Liabilities Current Assets – Current Liabilities

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Profitability Before Tax Net Income/Total Assets Before Tax Net Income/Net Worth Before Tax Net Income/Total Sales After Tax Net Income/Total Assets After Tax Net Income/Net Worth After Tax Net Income/Total Sales

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Leverage Total Liabilities Total Assets Long Term Debt (LTD) Total LTD + Net Worth Total Liabilities Net Sales

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Contingent Liabilities Guarantees or Warrantees Behind Products Litigation or Pending Lawsuits Unfunded Pension Liabilities Taxes Owed But Unpaid Limiting Regulations

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Comprehensive Environmental Response, Compensation and Liability Act This Law Makes Current and Past Owners of Contaminated Property, Current and Past Owners and Prior Operators of Businesses Located on Contaminated Property and Those Who Transport Hazardous Substances Potentially Liable

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Component of Sources and Uses of Funds Statement Changes in Cash Account Changes in Accounts Receivables Changes in Inventory Changes in Fixed Assets Changes in Accounts Payable Changes in Other Current Liabilities Changes in Long Term Debt Changes in Net Worth

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Sources and Uses of Funds Increase in Assets = Use of Funds Decrease in Assets = Source of Funds Increase in Liabilities = Source of Funds Decrease in Liabilities = Use of Funds Increase in Equity = Source of Funds Decrease in Equity = Use of Funds