LENDING TO BUSINESS FIRMS
Goal of This Chapter: To discover how many banks evaluate business loan requests and to reveal the factors bankers must consider in evaluating a business loan request.
Key Terms Presented in This Chapter
Self-liquidating loans Syndicated loans Working capital loans Revolving credit lines Compensating deposit balances Project loans Interim construction loans LBOs Asset-based loans Working capita; Factoring Contingent liabilities Term loans Sources and Uses of Funds Statement
Chapter Outline I. Introduction: The Importance of Business Loans and Business Lending Programs to
Banks II. Types of Business Loans
A. Short-Term Loans to Business Firms 1. Self-Liquidating Inventory Loans
2. Working-Capital Loans 3. Interim Construction Financing 4. Security-Dealer Financing 5. Retailer Financing 6. Asset-Based Financing 7. Syndicated Loans
B. Long-Term Loans to Business Firms
1. Term Business Loans 2. Revolving Credit Financing 3. Long-Term Project Loans 4. Loans to Support Acquisitions of Other Business Firms
III. Analyzing Business Loan Applications
A. Most Common Sources of Loan Repayment B. Analysis of a Business Borrower's Financial Statements C. Financial Ratio Analysis of a Customer's Financial Statements
1. The Business Customer's Control Over Expenses 2. Operating Efficiency: Measure of a Business Firm's Performance
Effectiveness
3. Marketability of the Customer's Product or Service 4. Coverage Ratios Measuring the Adequacy of Earnings 5. Liquidity Indicators for Business Customer
231
V.
Profitability Indicators
The Financial Leverage Factor as a Barometer of a Business Firm's Capital Structure
8. Contingent Liabilities (including Environmental Liabilities)
D. Preparing Sources-and-Uses-of-Funds Statements from Business Financial
Statements
E. Pro Forma Sources and Uses Statements and Balance Sheets F. The Loan Officer's Responsibility to Bank and Customer Summary of the Chapter
Concept Checks 6. 7.
18-1. What special problems does business lending present to the management of a bank?
While business loans are usually considered among the safest types of bank lending (their default rate, for example, is usually well below default rates on most other types of loans), these loans average much larger in dollar volume than other bank loans and, therefore, can subject a bank to excessive risk of loss and, if a substantial number of loans fail, can lead to the failure of a bank. Moreover, business loans are usually much more complex financial deals than most other kinds of bank loans, requiring larger numbers of bank personnel with special skills and knowledge. These additional resources required increase the magnitude of potential loss to a bank unless it manages its business loan portfolio with great care and skill.
18-2. What are the essential differences among working capital loans, open credit lines, asset-based loans, term loans, revolving credit lines, interim financing, project loans, and acquisition loans?
a. Working Capital Loans -- Loans to fund the current assets of a business, such as accounts receivable, inventories, or to replenish cash.
b. Open Credit Lines -- A credit agreement allowing a business to borrow up to a specified maximum amount of credit at any time until the point in time when the credit line expires.
c. Asset-based Loans -- Credit whose amount and timing is based directly upon the value, condition, and maturity of certain assets held by a business firm (such as accounts receivable or inventory) with those assets usually being pledged as collateral behind the loan.
d. Term Loans -- Business loans that have an original maturity of more than one year and normally are used to fund the purchase of new plant and equipment or to provide for a permanent increase in working capital.
e. Revolving Credit Lines -- Lines of credit that promise the business borrower access to any amount of borrowed funds up to a specified maximum amount; moreover,
232
the customer may borrow, repay, and borrow again any number of times until the credit line reaches its maturity date.
f.
g.
Project Loans -- Credit to support the start up of a new business project, such as the construction of an offshore drilling platform or the installation of a new warehouse or assembly line; often such loans are secured by the property or equipment that are part of the new project.
Acquisition Loans--Loans to finance mergers and acquisitions of businesses. Among the most noteworthy of these acquisition credits are leveraged buyouts of firms by small groups of investors.
Interim Financing -- Bank funding to start construction or to complete construction of a business project in the form of a short-term loan; once the project is completed, long-term funding will normally pay off and replace the interim financing.
h.
18-3. What aspects of a business firm's financial statements do bank loan officers and credit analysts examine carefully?
Bank loan officers and credit analysts examine the following aspects of a business firm's financial statements:
a. Control Over Expenses? Key ratios here include cost of goods sold/net sales; selling, administrative and other expenses/net sales; wages and salaries/net sales; and interest expenses on borrowed funds/net sales.
b. Activity or Efficiency? Important ratios here are net sales/total assets, and fixed assets, accounts and notes receivable, and cost-of-goods sold divided by average inventory levels.
c. Marketability of a Product, Service, or Skill? Key ratio measures in this area are the gross profit margin, or net sales less cost of goods sold to net sales, and the net profit margin, or net income after taxes to net sales.
d. Coverage? Important measures here include interest coverage (such as before-tax income and interest payments divided by total interest payments), coverage of interest and principal payments (such as earnings before interest and taxes divided by annual interest payments plus principal payments adjusted for the tax effect), and the coverage of all fixed payments (such as before-tax income plus interest payments plus lease payments divided by interest payments plus lease payments).
e. Profitability Indicators? Key barometers in this area can include such ratios as before-tax net income divided by total assets, net worth, or sales, and after-tax net income divided by total assets, net worth, or total sales.
233
f.
g.
Liquidity Indicators? Important ratio measures here usually include the current ratio (current assets divided by current liabilities), and the acid-test liquidity ratio (current assets less inventories divided by current liabilities).
Leverage indicators? Ratios indicating trends in this dimension of business performance usually include the leverage ratio (total liabilities/total assets or net worth), the capitalization ratio (of long-term debt divided by total long-term
liabilities and net worth), and the debt-to-sales ratio (of total liabilities divided by net sales).
One problem with employing ratio measures of business performance is that they only reflect symptoms of a possible problem but usually don't tell us the nature of the problem or its causes. Management must look much more deeply into the reasons behind any apparent trend in a ratio. Moreover, any time the value of a ratio changes, that change could be due to a shift in the numerator of the ratio, in the denominator, or both.
18-4. What aspect of a business firm's operations is reflected in its ratio of cost of goods sold to net sales? In its ratio of net sales to total assets? In its GPM ratio? Its ratio of income before interest and to taxes to total interest payments? Its acid-test ratio? In its ratio of before-tax net income to net worth? Its ratio of total liabilities to net sales? What are the principal limitations of these ratios?
The ratio of cost of goods sold to net sales is a widely used indicator of a business firm's expense controls and operating efficiency. The ratio of net sales to total assets reflects activity or efficiency, while the gross profit margin (GPM) measure reflects the marketability of a business's products or services. A firm's ratio of income before interest expense and taxes indicates how effectively a business is covering its interest expenses through the generation of before-tax income. The
acid-test ratio provides a rough measure of a firm's liquidity position, while the ratio of before-tax income to net worth represents a measure of profitability. Finally, the ratio of liabilities to sales is an indicator of management's use of financial leverage. These ratios are affected by changes in the numerator or the denominator or both; a financial or credit analyst would want to know the source of any change in a ratio's value. These ratios only measure problem symptoms; you must dig deeper to find the cause.
18-5. What are contingent liabilities and why might they be important in deciding whether to approve or disapprove a business loan request?
Contingent liabilities include such pending or possible future obligations as lawsuits against a business firm, and warranties or guarantees the firm has given to others regarding the quality, safety, or performance of its product or service . Another example is a credit guaranty in which the firm may have pledged its assets or credit to back up the borrowings of another business, such as a subsidiary. Environmental damage caused by a business borrower also has recently become of great concern as a contingent liability for many banks because a bank foreclosing on business property for nonpayment of a loan could become liable for cleanup costs, especially if the bank becomes significantly involved with a customer's business or treats foreclosed property as an investment rather than a repossessed asset that is quickly liquidated to recover the unpaid balance on a loan. Loan officers must be aware of all contingent liabilities because any or all of them could
234
become due and payable claims against the business borrower, weakening the firm's ability to repay its loan to the bank.
18-6. How can a Sources and Uses of Funds Statement aid a bank in making the decision to grant or deny a business loan request?
A sources-and-uses-of-funds statement shows the changes in a business firm's assets and liabilities as well as its flow of net profit and noncash expenses (such as depreciation) over a specific time period. It shows where the firm raised its operating capital during the time period under
examination and how it spent or used those funds in acquiring assets or paying down liabilities. From the perspective of a loan officer the sources-and-uses statement indicates whether the firm is relying heavily upon borrowed funds and sales of assets. These are two less desirable funding sources from the point of view of a bank lending money to a business firm. In contrast, bank loan officers usually prefer to focus upon cash flow - whether the firm is generating sufficient cash flow (net income plus noncash expenses) to repay most of its debt.
18-7. Should a bank loan officer ever say no to a business firm requesting a loan. Explain.
Loan officers will inevitably be confronted with some loan requests that will have to be flatly rejected, particularly in those cases where the borrower has falsified information or has a credit history of continually \"walking away\" from debt obligations. Even in these cases, however, the loan officer should be as polite as possible, suggesting to the customer what needs to be changed or improved for the future to permit the customer to be seriously considered for a loan.
Problems
18-1. Based upon the descriptions given in the text the type of business loan being discussed is:
A. Interim construction financing. B. Retailer financing or floorplanning loan. C. Asset-based financing or factoring. D. Self-liquidating inventory loan. E. Working capital loan. F. Security capital loan. G. Term loan. H. Acquisition loan or leveraged buyout. I. Revolving credit line. J. Project loan.
18-2. As a credit trainee you have been asked to evaluate the financial position of Hamilton Steel Castings, applying for renewal and increase in its 6-month line of credit to $7 million. The figures given in the case as well as the supporting background information suggest several developing problems. Hamilton has had a recent shakeup in its senior management, which usually leads to looser control of the firm until the new management gains sufficient experience.
235
Among the obvious problems are a decline in sales (from $48.1 million to $39.7 million) in the past six months. Hamilton's cost of goods sold dropped but by less than the decline in sales, thereby squeezing the firm's margin and net income. We note too that the firm, faced with
declining cash flows, has been forced to rely more heavily on borrowings which will mean that the bank's position will be less secure. Current assets have also declined while current liabilities are on the rise, thus reducing the firm's net liquidity position. The bank's relationship with Hamilton needs to be reviewed carefully with an eye to gaining additional collateral or reducing the bank's total credit commitment to the firm.
Alternative Scenario 1:
Given: Sales, cost of goods sold, and selling and administrative expenses grew an average of one percent per month over the past six months.
Solution: The growth in sales would be a definite improvement over the base case where sales declined each month.
Of course, the growth in cost of goods sold, which would be expected, dilutes some of the increase in revenues, as does the growth in selling and administrative expenses. However, overall,
Hamilton's operating income (and cash flow) position would be improved with the average one percent per month growth situation.
In the base case, Hamilton's EBIDT (Earnings Before Interest, Depreciation and Taxes) for June, for example, is -$ 2.2 million. Whereas, with the one percent per month growth, Hamilton's EBIDT for June would be $ 1.16 million.
Alternative Scenario 2:
Given: Current ratio rose gradually between January and June from 1.0 to 1.5, with current assets rising from $ 7 million to $ 9 million.
Solution: A current ration of 1.0 with current assets of $ 7 million means that current liabilities are also $ 7 million.
A current ratio of 1.5 (in June) with current assets of $ 9 million means that current liabilities are then $ 6 million.
The improved current ratio of 1.5 would be considered much better, particularly with the decline in current liabilities. This should improve the credit analyst's opinion of the loan request.
Alternative Scenario 3:
Given: Hamilton is seasonal with strong rebound in sales in summer and fall.
Solution: Knowing that the business is seasonal with improved performance in subsequent months would likely improve our outlook for this loan.
236
Additional information that would be desirable and helpful, if not essential, should include:
1) Past financial statements for the last two or three years, preferably on a monthly
basis. This could help us verify seasonality and improvement.
2) Industry outlook for the next six to eighteen months would also help in reinforcing
Hamilton's ability to service the debt from the summer and fall cash flows.
3) Additionally, information about the company's suppliers, other creditors,
customers, and competitors would be helpful.
4) Also, more information about other relationships that Hamilton has with Evergreen
would certainly be helpful.
In summary, the more information we have, the better our analysis and subsequent decisions will be.
18-3 Among the many financial ratios that could be computed given the data in this problem are the following:
Expense Control Ratios Operating Efficiency Measures Wages and Salaries = 61 = .0897 Inventory Turnover Ratio = 520 = 4.81 x Net Sales 680 108 Overhead Expenses = 29 = .0426 Net Sales/ = 680 1.115 x Net Sales 680 Total Assets 610 Depreciation Expenses = 15 = .0176 Net Sales/ = 680 = 2.26 x Net Sales 680 Fixed Assets 301 Interest Expense = 18 = .0265 Net Sales/Accounts = 680 = 7.16 x Net Sales 680 Receivable 95 Cost of Goods Sold/ = 520 = .7647 Average = 95 / 680 /360 = 50.29 days Net Sales 680 Collection Period Taxes/Net Sales = 2 / 680 = .0029 Marketability Indicators Coverage Ratios GPM = 680 – 520 = .2353 680 Interest Coverage = 25 = 1.39 x 18 NAM = 5 = .0074 680
237
Coverage of Principal and Interest Payments =
25 24.36% 5518 (1 - .35)Profitability Measures Liquidity Indicators Current Ratio = Acid-Test Ratio=
$203 = 1.068 x $190
$203 - $108 = .50 x $190
Before-Tax Net Income/ = 7 = .0115 Total Assets 610 After-Tax Net lncome/ = 5 = .0082 Total Assets 610
Before-Tax Net Income/ = 7 = .0875 Net Liquid Assets = $203 - $108 - Net Worth or Equity 80 $190 = - 95 Capital Net Working Capital = $203 - $190 After-Tax Net lncome/= 5 = .0625 = $13 Net Worth or Equity 80 Capital
Leverage Ratios Before-Tax Net Income/ = 7 = .0103 Sales 680 After-Tax Net lncome/ = 5 = .0074 Sales 680
Total Liabilities/Total
Assets = Long-Term debt = Long-Term Liabilities
530 = .8689 610 325 = .8025 405
Debt-to-Sales Ratio = Total Liabilities = 530 = .7794 Net Sales 680
18-4. The Sources and Uses of Funds Statement for Chamrod Corporation would appear as follows:
Sources and Uses for the Coming Year Sources and Uses for the Coming Year S & U Item Source Use S & U Item Source Use Cash Account $115 Accounts Pay. $60 Accounts Rec. $207 Notes Payable $217 Inventories $79 Taxes Payable $111 Net Fixed Assets $158 Long Term Debt $59 Other Assets $21 Common Stock Undivided Profits $125 Totals $115 $465 Totals $461 $111
There are several areas of possible concern for a bank loan officer viewing Chamrod's projected figures. First, the firm is relying heavily upon increasing debt of all kinds to finance its growth in assets. The increase in notes payable of $217 million indicates growing reliance on bank debt
238
supplemented by sizable increases in supplier-provided credit (accounts payable) and long-term debt obligations (most likely, bonds) with no change in funds provided by issuing stock. The bank could experience a serious weakening in the strength of its claim against the firm as other creditors post a more substantial claim against Chamrod's assets.
Chamrod is projecting a sizable increase in its retained earnings (undivided profits) which suggests that management is counting on a year of strong earnings. However, both accounts receivable and inventories (as well as net fixed assets) are growing rapidly, perhaps reflecting troubles in collecting from the firm's customers and in marketing Chamrod's products and services. The bank's loan officer would want to explore with the company the bases for its projected jump in net income and why accounts receivable and inventories are expected to rise in such large amounts.
18-5 Which of the following dimensions of a business firm’s financial and operating performance do each of the following ratios measure?
Expense Operating Liquidity Marketability Coverage Profitability Leverage Control Efficiency Indicators of Measures Measures Factors Measures Measures Customer’s
Product
Overhead Average Current Gross Profit Income After Tax Total Expenses/ Collection Ratio Margin Before Net Liabilities/ Net Sales Period Interest, Income/ Total
Taxes and Net Worth Assets Lease Payments/ Interest Plus Lease Payments
Depreciation Annual Current Net Income Interest Before tax Unfunded Expenses/ Cost of Assets After Taxes/ Coverage net income/ Pension Net Sales Goods Less Net Sales total assets Liability
Sold/ Current (Contingent Average Liabilities Liability) Inventory
Cost of Net Sales/ Acid Test After Tax net Total Goods Sold/ Net Fixed Ratio Income/ Liabilities/ Net Sales Assets Total Sales Net Sales Interest Net Sales/ Long Term Expenses on Total Debt/ Total Borrowed Assets Long Term Funds/ net Liabilties Sales and Net
Worth
Net Sales/
Accounts and Notes
239
Receivable
Market Factor – Percentage Change in the Firm’s stock Price
Web Site Problems
1. If you are a business lender and your assignment in the bank has recently been changed from large corporate loans to small business lending – an area where you have almost no experience – where on the web could you go to help you learn more about credit for small business? What web sites discussed earlier are likely to be most helpful?
One of the best web sites to get information about small business lending is the web site of the Small Business Administration. They have information about all sorts of things at their web site, http://www.sba.gov/. You can also do a search of the web and find that there is a lot of information and articles about small business lending that would be helpful.
2. What is factoring? See if you can figure out how to use the world wide web to learn more about this type of business financing. What site, mentioned earlier, in the chapter, seems to be of the most help?
Factoring is a way to sell your accounts receivables and receive immediate cash for those assets. If you do a search of the web on factoring of accounts receivables you can find a number of companies that specialize in factoring accounts receivables. One that I found is http://www.pbcc.com/, another is the one mentioned earlier in the chapter at
http://www.factors.net/. Either of these web sites or several others could give you more information about this important financing source.
3. Business lenders are made, not born. What ways can you find, including what sites on the web, to help you stay abreast of this rapidly changing field?
If you do a search on business lending, you find a lot of information on this important topic. You can find web sites dealing with anything from automated credit evaluation systems to articles about biases in traditional credit scoring models to articles about some of the new lending practices designed to stimulate lending to traditionally under represented groups. There are many sources of information available about bank lending and the trends and changes that are taking place in this important field.
240
因篇幅问题不能全部显示，请点此查看更多更全内容