Chapter

Seventeen

Lending to Business Firms and

Pricing Business Loans
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Short Term Business Loans

Self-Liquidating Inventory Loans
Working Capital Loans
Interim Construction Loans
Security Dealer Financing
Retailer and Equipment Financing
Asset-Based Financing
Syndicated Loans
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Bank Management and Financial

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Long Term Business Loans

Term Loans
Revolving Credit Lines
Project Loans
Loans to Support Acquisitions of
Other Business Firms

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Bank Management and Financial

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Sources of Repayment for

Business Loans
The Borrowers Profits or Cash Flows
Business Assets Pledged as Collateral
Strong Balance Sheet With Ample
Marketable Assets and Net Worth
Guarantees Given By Businesses

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Bank Management and Financial

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Analyzing Business Loan

Applications
Common Size Ratios of Customer
Over Time
Financial Ratio Analysis of
Customers Financial Statements
Current and Pro Forma Sources
and Uses of Funds Statement
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Bank Management and Financial

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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 Firms Capital Structure
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Bank Management and Financial

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Expense Control Measures

Cost of Goods Sold/Net Sales
Selling, Administrative and Other
Expenses/Net Sales
Depreciation Expenses/Net Sales
Interest Expenses on Borrowed Funds
/Net Sales
Taxes/Net Sales
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Bank Management and Financial

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Operating Efficiency
Annual Costs of Goods
Sold/Average Inventory
Average Receivables Collection
Period
Net Sales/Net Fixed Assets
Net Sales/Total Assets
Net Sales/Accounts Receivables
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Bank Management and Financial

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Marketability of Product or
Service
Gross Profit Margin
Net Profit Margin

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Bank Management and Financial

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Coverage Measures
Interest Coverage
Coverage of Interest and Principal
Payments

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Bank Management and Financial

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Liquidity Measures
Current Assets/Current Liabilities
Acid Test Ratio
Working Capital
Net Liquid Assets

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Profitability Measures
Before Tax Net Income/Total Assets
After Tax Net Income/Total Assets
Before Tax Net Income/Net Worth
After Tax Net Income/Net Worth

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Leverage or Capital
Structure Measures
Leverage Ratio
Total Liabilities/Net Worth
Capitalization Ratio
Debt to Sales Ratio

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Types of Contingent
Liabilities
Guarantees or Warrantees
Behind Products
Litigation or Pending Lawsuits
Unfunded Pension Liabilities
Taxes Owed But Unpaid
Limiting Regulations
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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
17-15

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Bank Management and Financial

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Reserved.

Component of Sources and

Uses of Funds Statement
Cash Flows from Operations
Cash Flows from Investing
Activities
Cash Flows from Financing
Activities
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Bank Management and Financial

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Traditional (Direct)
Operating Cash Flows
Net Sales Revenue Cost of Goods
Sold Selling, General and
Administrative Taxes Paid in Cash +
Non Cash Expenses

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Indirect Operating Cash

Flows
Net Income + Non Cash Expenses +
Losses from the Sale of Assets Gains
from the Sale of Assets Increases in
Assets Associated with Operations +
Increases in Current Liabilities
Associated with Operations Decreases
in Current Liabilities Associated with
Operations + Decreases in Current
Assets Associated with Operations
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Bank Management and Financial

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Methods Used to Price

Business Loans
Cost-Plus Loan Pricing Method
Price Leadership Model
Below Prime Market Pricing
Customer Profitability Analysis

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Cost-Plus Loan Pricing

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Price Leadership Model

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Prime Rate
Major Banks Established a Base
Lending Fee During the Great
Depression. At that Time It Was the
Lowest Interest Rate Charged Their
Most Credit Worthy Customers for
Short-Term Working Capital Loans

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Bank Management and Financial

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LIBOR

The London Interbank Offer Rate.

The Rate Offered on Short-Term
Eurodollar Deposits With Maturities
Ranging From a Few Days to a Few
Months

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Below-Prime Market Pricing

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Bank Management and Financial

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Customer Profitability
Analysis (CPA)
Estimate Total Revenues From Loans
and Other Services
Estimate Total Expenses From
Providing Net Loanable Funds
Estimate Net Loanable Funds
Estimate Before Tax Rate of Return
By Dividing Revenues Less Expenses
By Net Loanable Funds
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Bank Management and Financial

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