Professional Documents
Culture Documents
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 (CPA)
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• Syndicated Loans
Syndicated Loans normally consists of a loan package extended to a
corporation by a group of lenders. Lenders engage in syndicated loans both to
reduce risk exposure of these large loans, and to earn fee income (such as
facility fees to open a credit line)
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• Term Loans
• Revolving Credit Lines
• Project Loans
• Loans to Support Acquisitions of Other
Business Firms
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Acquisition loan
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Credit analysis
• Comparing a business customer’s
performance to the performance of its
industry
• It is standard practice among loan officers
to compare each business customer’s entire
industry.
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Contingent Liabilities:
usually not shown on customer balance sheets are other potential
claims against the borrower that loan officers must be aware of
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Marginal
Cost of Estimated
Nonfund Bank's
Loan Raising Margin to
Bank Desired
Interest = Loanable + + Compensate +
Operating Profit
Rate Funds to Bank for
Costs Margin
Lend to Default Risk
Borrower
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Default
Risk Term Risk
Loan
Base or Premium Premium for
Interest = + +
Prime Rate for Non- Longer
Rate
Prime Term Credit
Borrowers
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Prime Rate
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LIBOR
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Interest Cost
Loan Markup
of Borrowing
Interest = + for Risk
in the Money
Rate and Profit
Market
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Quick Quiz
• What aspects of a business firm’s financial
statements do loan officers and credit analysts
examine carefully?
• What methods are used to price business loans?
• Suppose a bank estimates that the marginal cost of
raising loanable funds to make a $10m loan to one
of its corporate customers is 4%, its nonfunds
operating costs to evaluate and offer this loan are
0.5%, the default-risk premium on the loan is
0.375%, a term-risk premium of 0.625% is to be
added, and the desired profit margin is 0.25%.
What loan rate should be quoted this borrower?
How much interest will this borrower pay in a year?
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