2. CHAPTER SIXTEEN Lending To Business Firms And Pricing Business Loans
The purpose of this chapter is to explore how bankers can respond to a business customer seeking a loan and to reveal the factors they must consider in evaluating a business loan request. In addition, we explore the different methods used today to price business loans and to evaluate the strengths and weaknesses of these pricing methods for achieving a financial institution’s goals.

3. Short Term Business Loans
Self-Liquidating Inventory Loans
Working Capital Loans
Interim Construction Loans
Security Dealer Financing
Retailer Financing
Asset-Based Financing

4. 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

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

6. 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

7. 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

8. 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

9. 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

10. Operating Efficiency Costs of Goods Sold/Average Inventory
Net Sales/Total Assets
Net Sales/Fixed Assets
Net Sales/Accounts Receivables
Accounts Receivables/(Net Sales/360)

11. Marketability of Product or Service
(Net Sales – Cost of Goods Sold)/Net Sales
Net Income After Taxes/Net Sales

12. Income Before Interest and Taxes Interest Payments
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

13. Liquidity Current Assets Current Liabilities
Current Assets – Inventory Current Liabilities
Current Assets – Inventory (raw) –Current Liabilities
Current Assets – Current Liabilities

14. 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

15. Leverage Total Liabilities Total Assets
Long Term Debt (LTD) Total LTD + Net Worth
Total Liabilities Net Sales

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

17. 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

18. 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

19. 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

20. Methods Used to Price Business Loans
Cost-Plus Pricing Models
Price Leadership Pricing Models
Below Prime Market Pricing (Markup Model)
Loans Bearing Maximum Interest Rates
Customer Profitability Analysis

21. Cost-Plus Loan Pricing

22. Price Leadership Model

23. 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

24. 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

25. Below-Prime Market Pricing

26. Cap Rate Model
Banks Offer a Floating Rate Loan With an Agreed Upon Upper Limit on the Loan Contract Regardless of the Course of Future Interest Rates

27. 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