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Business Loans
Key Topics
Types of Business Loans: Short Term and Long Term
Analyzing Business Loan Requests
Collateral and Contingent Liabilities
Sources and Uses of Business Funds
Pricing Business Loans
Customer Profitability Analysis
Introduction
Securing large amounts of credit that many businesses require can be a challenging task
Business loans are often called commercial and industrial (C&I) loans
C&I loans rank among the most important assets banks and their closest competitors
hold
For U.S. insured commercial banks, close to one-fifth of their loan portfolio is classified
as business or C&I loans
This percentage of the total loan portfolio does not include many commercial real
estate loans and loans to other financial institutions
A barometer of the quality of a firms management is how it controls its expenses and how well
its earnings are likely to be protected and grow
Selected financial ratios to monitor a firms expense control:
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
If the net rate of return is positive, the proposed loan is acceptable because all
expenses have been met
If the net rate of return is negative, the proposed loan and other services
provided to the customer are not correctly priced as far as the lender is
concerned
The greater the perceived risk of the loan, the higher the net rate of return the
Introduction
Consumer debt has become one of the fastest growing forms of borrowing money
Nearly $14 trillion in volume (including both mortgage and nonmortgage consumer
debt) in the U.S.
The modern dominance of banks in lending to households stems from their growing
reliance on individuals and families for their chief source of funds checkable and
savings deposits
Consumer credit is often among the most profitable services a lender can offer
However, services directed at consumers can also be among the most costly and risky
financial products
Customers must be told the reasons why credit terms were being changed
Card companies are required to post their contracts on the Internet so customers can
shop around
Card holders must receive periodic billing statements at least three weeks before
monthly payments are due
An expanded box must be included on each monthly billing statement, indicating
the amount of interest paid and the consequences of paying the minimum amount
Fall within the Federal Reserve Boards Regulation Z
Adjusts for the length of time a borrower actually has use of credit
If the customer is paying off the loan gradually, this approach determines the
declining loan balance, and that reduced balance is then used to determine the
amount of interest owed