Escolar Documentos
Profissional Documentos
Cultura Documentos
Presented by Group 1
1. Aye Hnin Maw (Roll No-4)
2. Ei Ei Myat (Roll No-8)
3. Lei Yin Htwe (Roll No-37)
4. Lwin Mie Mie Htay (Roll No-38)
5. May Phyu Sin (Roll No-40)
6. Naw Tin Moe Moe Swe (Roll No-53)
7. Phoo Pwint Mon (Roll No-55)
8. Zayar Lynn (Roll No-85)
9. Zin Zin Wint Phyu Oo (Roll No-90)
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
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Business Loans and Brief History of Business Lending
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Types of Business Loans
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Short-Term Loans to Business Firms
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Short-Term Loans to Business Firms (continued)
Working Capital Loans
Short-run credit that lasts from a few days to one year
Most often used to fund the purchase of inventories
Frequently it is designed to cover seasonal peaks in the
business customer's production levels and credit needs
Secured by accounts receivable or by pledges of inventory
Carry a floating interest rate
A commitment fee is charged on the unused portion of the
credit line and sometimes on the entire amount of funds made
available
Compensating deposit balances may be required from the
customer
Recently compensating deposit balances as a part of a
business-loan arrangement has been on the decline
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Short-Term Loans to Business Firms (continued)
Interim Construction Financing
Secured short-term loan used to support the
construction of homes, apartments, office buildings,
shopping centers, and other permanent structures
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Short-Term Loans to Business Firms (continued)
Retailer and Equipment Financing
Lenders support installment purchases of automobiles,
home appliances, and other durable goods by financing the
receivables that dealers selling these goods take on when
they write installment contracts to cover customer
purchases
Asset-Based Financing
Credit secured by the shorter-term assets of a firm that are
expected to roll over into cash in the future
Syndicated Loans (SNCs)
A loan package extended to a corporation by a group of
lenders
Many SNCs are traded in the secondary (resale) market
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Long-Term Loans to Business Firms
Term Business Loans
Designed to fund longer-term business investments, such as
the purchase of equipment or the construction of physical
facilities, covering a period longer than one year
Normally loans are secured by fixed assets (plant or
equipment)
Revolving Credit Financing
Allows a customer to borrow up to a prespecified limit, repay
all or a portion of the borrowing, and reborrow as necessary
One of the most flexible of all business unsecured loans
May be short-term or long-term
Lenders normally charge a loan commitment fee
Two types: formal loan commitment and confirmed credit
line
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Long-Term Loans to Business Firms (continued)
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Long-Term Loans to Business Firms (continued)
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Analyzing Business Loan Applications
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Analyzing Business Loan Applications (continued)
Analysis of a Business Borrower’s Financial Statements
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Financial Ratio Analysis of a Customer’s
Financial Statements
Information from balance sheets and income statements is
typically supplemented by financial ratio analysis
Critical areas of potential borrowers loan officers consider:
Ability to control expenses
Operating efficiency in using resources to generate sales
Marketability of product line
Coverage that earnings provide over financing cost
Liquidity position, indicating the availability of ready cash
Track record of profitability
Financial leverage (or debt relative to equity capital)
Contingent liabilities that may give rise to substantial
claims in the future
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Financial Ratio Analysis of a Customer’s
Financial Statements (continued)
The Business Customer’s Control over Expenses
A barometer of the quality of a firm’s 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 firm’s 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
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Financial Ratio Analysis of a Customer’s
Financial Statements (continued)
Operating Efficiency: Measure of a Business Firm’s
Performance Effectiveness
It is also useful to look at a business customer’s operating
efficiency
• How effectively are assets being utilized to generate sales and
how efficiently are sales converted into cash?
Important financial ratios here include:
• Inventory turnover ratio - annual cost of goods sold/Average inventory
• Turn over of fixed assets ratio- Net sales/Net fixed assets
• Turn over of total assets ratio- Net sales/Total assets
• Net sales/Accounts and notes receivable
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Financial Ratio Analysis of a Customer’s
Financial Statements (continued)
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Financial Ratio Analysis of a Customer’s
Financial Statements (continued)
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Financial Ratio Analysis of a Customer’s
Financial Statements (continued)
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Financial Ratio Analysis of a Customer’s
Financial Statements (continued)
Coverage Ratios: Measuring the Adequacy of Earnings
Coverage refers to the protection afforded creditors
based on the amount of a business customer’s earnings
The best-known coverage ratios include
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Financial Ratio Analysis of a Customer’s
Financial Statements (continued)
Liquidity Indicators for Business Customers
The borrower’s liquidity position reflects his or her
ability to raise cash in timely fashion at reasonable cost,
including the ability to meet loan payments when they
come due
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Financial Ratio Analysis of a Customer’s
Financial Statements (continued)
Profitability Indicators
How much net income remains for the owners of a
business firm after all expenses (except dividends) are
charged against revenue?
Popular bottom line indicators include
• Before-tax net income / total assets, net worth, or total sales
• After-tax net income / total assets (or ROA)
• After-tax net income / net worth (or ROE)
• After-tax net income / total sales (or ROS) or profit margin
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Financial Ratio Analysis of a Customer’s
Financial Statements (continued)
The Financial Leverage Factor as a Barometer of a
Business Firm’s Capital Structure
Any lender is concerned about how much debt a
borrower has taken on in addition to the loan being
sought
Key financial ratios used to analyze any borrowing
business’s credit standing and use of financial leverage
include
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Comparing a Business Customer’s Performance
to the Performance of Its Industry
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Comparing a Business Customer’s Performance
to the Performance of Its Industry (continued)
Contingent Liabilities
Usually not shown on customer balance sheets are other
potential claims against the borrower:
• Guarantees and warranties behind the business firm’s products
• Litigation or pending lawsuits against the firm
• Unfunded pension liabilities
• Taxes owed but unpaid
• Limiting regulations
These contingent liabilities can turn into actual claims against
the firm’s assets and earnings at a future date
Loan officer must ask the customer about pending or
potential claims against the firm
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Comparing a Business Customer’s Performance
to the Performance of Its Industry (continued)
Contingent Liabilities
Environmental Liabilities
• The Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA) and its Super
Fund Amendments
• Make current and past owners of contaminated property or of
businesses located on contaminated property and those who
dispose of or transport hazardous substances potentially liable
for any cleanup costs associated with environmental damage
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Comparing a Business Customer’s Performance
to the Performance of Its Industry (continued)
Contingent Liabilities (continued)
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Preparing Statements of Cash Flows from
Business Financial Statements
The Statement of Cash Flows illustrates how cash receipts
and disbursements are generated by operating, investing,
and financing activities
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Preparing Statements of Cash Flows from
Business Financial Statements (continued)
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Preparing Statements of Cash Flows from
Business Financial Statements (continued)
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Pricing Business Loans
One of the most difficult tasks in lending is deciding how
to price a loan
Lender wants to charge a high enough interest rate to
ensure each loan will be profitable and compensate the
lending institution for the risks involved
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Pricing Business Loans (continued)
The Price Leadership Model
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Pricing Business Loans (continued)
In the U.S., the prevailing prime rate is considered to be
the most common base rate
Two different floating prime rate formulas were soon
developed by leading money center banks
Prime-plus method
Times-prime method
London Interbank Offered Rate (LIBOR)
Leading commercial lenders have switched to LIBOR-
based loan pricing due to the growing use of
Eurocurrencies as a source of loanable funds
LIBOR-based loan rate = LIBOR + Default-risk premium + Profit margin
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Pricing Business Loans (continued)
Below-Prime Market Pricing
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Pricing Business Loans (continued)
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Pricing Business Loans (continued)
Customer Profitability Analysis (CPA)
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Pricing Business Loans (continued)
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Summary
Business loans are often divided into short term (under one
year) and long term (more than a year to Maturity).
Sometimes more meaningful classification divides these credits
into working capital loans and term loans including seasonal
open credit dealer financing asset-based loans, revolving credit,
project loans .
Among the more important credit evaluation techniques used
today are
Composition analysis of borrower financial statements
(including the use of common-size balance sheets and income
statements);
Financial ratio analysis (including ratio measures of expense
control, efficiency, coverage, profitability, liquidity, and
leverage);
Actual and pro forma statements of cash flows.
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Summary
Several different methods for pricing business loans have
appeared over the years, including cost-plus loan pricing, price
leadership loan pricing, below-prime loan pricing, and customer
profitability analysis.
Many business loans today are priced directly off money market
interest rates (such as LIBOR or the prevailing Federal funds
rate) with narrow profit margins reflecting intense competition.
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Thanks for your kind attention
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