Chapter

Seventeen

Lending to Business Firms and

Pricing Business Loans
2008 The McGraw-Hill
McGraw-Hill/Irwin
Companies, All Rights Reserved
 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
17-2
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 Long Term Business Loans

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

17-3
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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

17-4
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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
17-5
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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

17-6
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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

17-7
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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
17-8
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 Marketability of Product or
Service

Gross Profit Margin

Net Profit Margin

17-9
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 Coverage Measures

Interest Coverage
Coverage of Interest and Principal
Payments

17-10
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 Liquidity Measures

Current Assets/Current Liabilities

Acid Test Ratio
Working Capital
Net Liquid Assets

17-11
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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

17-12
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 Leverage or Capital
Structure Measures

Leverage Ratio
Total Liabilities/Net Worth
Capitalization Ratio
Debt to Sales Ratio

17-13
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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

17-14
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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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 Component of Sources and
Uses of Funds Statement

Cash Flows from Operations

Cash Flows from Investing
Activities
Cash Flows from Financing
Activities

17-16
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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

17-17
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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

17-18
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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

17-19
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 Cost-Plus Loan Pricing

17-20
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 Price Leadership Model

17-21
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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

17-22
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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

17-23
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 Below-Prime Market Pricing

17-24
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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
17-25
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