Types of Loans
Short Description
bank loans...
Description
544 Part Six Providing Providing Loans to Businesse Businessess and Consumers
17-2 Brief History of Business Lending ) Commercial and industrial or !usiness) loans re"resented t#e earliest form of lending t#at !an$s carried carr ied out in t#eir more t#an 2%&&&-year 2%&&&- year #istory' #istor y' Loans extended extend ed to s#i" o(ners% o(ners % mining mining o"erators% o"erators% goods manufacturers manufacturers%% and "ro"erty "ro"erty o(ners dominated dominated !an$ers !an$ers loan "ortfolios "ortfo lios for centuries' centur ies' *#en% late in t#e 1+t# and early earl y 2&t# 2 &t# centuries centur ies ne( com"etitors, com"eti tors, "articularl "arti cularl y finance financ e com"anies% com"an ies% life and "ro"ertyca "ro"er tycasualt sualty y insuran i nsurance ce firms% firms % and some t#rift t#rif t institution institutions,entere s,entered d t#e !usiness lending field% "lacing "lacing do(n(ard do(n(ard "ressure "ressure on t#e "rofit margins of many !usiness lenders' .n todays (orld% loan officers s$illed in e/aluating t#e credit re0uests of !usiness firms ran$ among t#e most ex"erienced and #ig#est-"aid "eo"le in t#e financial-ser/ices field% along (it# in/estment !an$ers security under(riters)% (#o also "ro/ide funds to t#e !usiness sector'
17- *y"es *y"es of Business Loans ) Ban$s% finance com"anies% and com"eting !usiness lenders grant many different ty"es of commercial loans' mong t#e most (idely used forms of !usiness credit are t#e follo(ing3 Key URL *o learn more a!out #el"ful "ro "rocedu cedure ress in a""l a""ly ying ing for for small !usiness loans% see% in "art "artic icul ular ar%% (((' business.com/directory .
Short-Term Business Loans Self-liquidating inventory loans Working capital loans nterim construction !nancing Security dealer !nancing Retailer and equipment !nancing "sset-#ased loans $accounts receiva#le !nancing% factoring% and inventory !nancing&
• • •
Long Term -Term Business Business Loans Loans Term loans loans to support support the purcha purchase se of equipme equipment% nt% rollin rolling g stock% stock% and structures Revolving credit !nancing 'ro(ect loans Loans Loans to support support acquisition acquisitions s of other #usiness !rms
•
•
•
•
•
•
•
17-4 S#ort-*erm Loans to Business irms ) Self-Liquidating Inventory Loans Historically% commercial !an$s #a/e !een t#e leaders in extending s#ort-term credit to !usinesses' .n fact% until orld ar .. !an$s granted mainly self-liquidating loans to !usiness firms' *#ese loans usually (ere used to finance t#e "urc#ase of in/entory,ra( materials or finis#ed goods to sell' Suc# loans ta$e ad/antage of t#e normal cash cycle inside a !usiness firm3 1'Cas# 1'Cas# inclu includin ding g !orro( !orro(ed ed cas#) cas#) is s"ent s"ent to ac0uir ac0uiree in/ent in/entori ories es of ra( materia materials ls and semifinis#ed or finis#ed goods' 2'6oods are "roduced or s#el/ed and listed for sale' 'Sales are made often on credit)' 4'*#e cas# recei/ed immediately or later from credit -sales) is t#en usedto re"ay -t#e self li0uidatingloan' .n t#is case% t#e term of t#e loan !egins (#en cas# is needed to "urc#ase in/entory and ends "er#a"s in 8& to +& days) (#en cas# is a/aila!le in t#e firms account to (rite t#e lender a c#ec$ for t#e !alance of its loan' #ile most lenders today ma$e a far (ider array of !usiness loans t#an 9ust sim"le self-
li0uidating credits% t#e s#ort-term loan,fre0uently dis"laying many of t#e features of selfli0uidation,continues to account for a significant s#are of all loans to !usiness firms'
C#a"ter 17 Lending to Business irms and Pricing Business Loam 545
.n fact% most !usiness loans co/er only a fe( (ee$s or mont#s and are usually related closely to t#e !orro(ers need for s#ort-term cas# to finance "urc#ases of in/entory or co/er "roduction costs% t#e "ayment of taxes% interest "ayments on de!t% and di/idend "ayments to stoc$#olders' *#ere is concern in t#e !an$ing and commercial finance industries today t#at traditional in/entory loans may !e on t#e decline' *#an$s to t#e de/elo"ment of 9ust in time :.*) and su""ly c#ain management tec#ni0ues !usinesses can continuously monitor t#eir in/entory le/els and more 0uic$ly re"lace missing items' ;eflecting t#is trend% in/entoryto-sales ratios recently #a/e !een declining in many industries' *#us% t#ere a""ears to !e less need for traditional in/entory financing and many !usinesses are ex"eriencing lo(er in/entory financing costs' .n t#e future% lenders (ill !e forced to de/elo" ot#er ser/ices in order to re"lace "otential losses in in/entory-loan re/enues as ne( soft(are-dri/en tec#nology s"eeds u" ordering and s#i"ment% allo(ing !usinesses to get !y (it# leaner in-#ouse stoc$s of goods and ra( materials'
Working Capital Loans @ey A;L .f you (ant to learn more a!out t#e regulations a""lica!le to loans for small !usinesses and for minority grou"s including loans made to minority-o(ned !usinesses) (#ere can you go See t#e educational "am"#lets a/aila!le at (((' federalreser/e'go/'
Working capital loans "ro/ide !usinesses (it# s#ort-run credit% lasting from a fe( days to a!out one year' or$ing ca"ital loans are most often used to fund t#e "urc#ase of in/entories in order to "ut goods on s#el/es or to "urc#ase ra( materials< t#us% t#ey come closest to t#e traditional self-li0uidating loan descri!ed "r e/iously' re0uently t#e (or$ing ca"ital loan is designed to co/er seasonal "ea$s in t#e !usiness customers "roduction le/els and credit needs' or exam"le% a clot#ing manufacturer antici "ating #ea/y demand in t#e fall for !ac$-to-sc#ool clot#es and (inter (ear (ill re0uire s#ort-term credit in t#e late s"ring and summer to "urc#ase in/entories of clot# and #ire additional (or$ers' *#e manufacturers lender can set u" a line of credit stretc#ing from six to nine mont#s% "ermitting t#at manufacturer to dra( u"on t#e credit line as needed o/er t#is "eriod' *#e amount of t#e credit line is determined from t#e manufacturers esti mate of t#e maximum amount of funds t#at (ill !e needed at any "oint during t#e six to nine-mont# term of t#e loan' Suc# loans are fre0uently rene(ed under t#e "ro/ision t#at t#e !orro(er "ay off all or a significant "ortion of t#e loan !efore rene(al is granted' =ormally% (or$ing ca"ital loans are secured !y accounts recei/a!le or !y "ledges of in/entory and carry a floating interest rate on t#e amounts actually !orro(ed against t#e a""ro/ed credit line' commitment fee is c#arged on t#e unused "ortion of t#e credit line and sometimes on t#e entire amount of funds made a/aila!le' Compensating deposit balances may !e re0uired from t#e customer' *#ese include re0uired de"osits (#ose min imum si>e is !ased on t#e si>e of t#e credit line e'g'% 1 to 5 "ercent of t#e credit line) and re0uired de"osits e0ual to a sti"ulated "ercentage of t#e total amount of credit actually used !y t#e customer e'g'% 15 to 2& "ercent of actual dra(ings against t#e line)'
Interim Construction Financing "o"ular form of secured s#ort-term lending is t#e interim construction loan, used to su" "ort t#e construction of #omes% a"artments% office !uildings% s#o""ing centers% and ot#er "ermanent structures' lt#oug# t#e structures in/ol/ed are "ermanent% t#e loans t#emsel/es are tem"orary' *#ey "ro/ide !uilders (it# funds needed to #ire (or$ers% rent or lease construction e0ui"ment% "urc#ase !uilding materials% and de/elo" land' But once t#e construction "#ase is o/er% t#is s#ort-term loan usually is "aid off (it# a longer-term mortgage loan issued !y anot#er lender% suc# as an insurance com"any or "ension fund' .n fact% many com mercial lenders (ill not lend money to a "ro"erty de/elo"er until t#at customer #as secured a mortgage loan commitment to "ro/ide long-term financing of a "ro9ect once its construction is com"leted' ;ecently% some lenders #a/e issued ?mini"ermanent? loans% "ro/iding funding for construction and t#e early o"eration of a "ro9ect for as long as fi/e to se/en years'
596 Part Six Providing Loans to Businesses and Consumers
Security Dealer Financing Key URLs
ealers
in
securities
Business loan officers need s#ort-term #a/e a !ig 9o! today financing to "urc#ase $ee"ing u" (it# n e( se cu ri tie s and c#anging trends in t#e t#eir existing nature and tec#nology carry of commercial credit' "or tfolios of sec urities *#e e! aids t#em in until t#ey are sold to t#is educational area c us to me rs or r ea c# t#roug# suc# sites as maturity' Suc# loans t#ose maintained !y t#e normally are readily ;is$ Danagement !e cau se o f ssociation ;D) at gr an te d ((('rma#0'org and t#eir #ig# 0uality, Fuic$ Start at often !ac$ed !y ((('0uic$-start'net '
"ledging t#e dea lers #oldings of go/ernment securities as collateral' Doreo/er% many loans to securities dealers are so s#ort,o/ernig#t to a fe( days,t#at t#e lender can 0uic$ly reco/er its funds or ma$e a ne( loan at a #ig#er interest rate if credit mar$ets #a/e tig#tened u"' related ty"e of loan is extended to investment banking firms to su""ort t#eir under(riting of ne( cor"orate !onds% stoc$s% and go/ernment de!t' Suc# issues of securities occur (#en in/estment !an$ers #el" t#eir !usiness clients finance a merger% assist in ta$ing a com"any "u!lic so t#at its o(ners#i" s#ares can !e "urc#ased !y any interested in/estor% or aid in launc#ing a com"letely ne( /entur e' Ence t#e in/estment !an$er is a!le to sell t#ese ne( securities% t#e loan "lus interest o(ed is re"aid' Ban$s and security firms also lend directly to !usinesses and indi/iduals !uying stoc$s% !onds% o"tions% and ot#er financial instruments' Dargin re0uirements enforced in t#e Anited States !y t#e ederal ;eser/e Board usually limit suc# loans to no more t#an #alf t#e amount of t#e security or securities !eing ac0uired under ;egulation A)' Ho(e/er% in an effort to aid t#e mar$et for small !usiness ca"ital% t#e ed ruled in ecem!er 1++7 t#at selected lenders could loan u" to 1&& "ercent of t#e "urc#ase "rice of ?small ca"? stoc$s listed !y =SF'
Retailer and Equipment
Financing Business lenders su""ort installment "urc#ases of automo!iles % #ome a""liances% furniture% !usiness e0ui"ment% and ot#er dura!le goods !y financing t#e recei/a!les t#at dealers selling t#ese goods ta$e on (#en t#ey (rite installment contracts to co/er customer "urc#ases' .n turn% t#ese contracts are re/ie(ed !y lending institutions (it# (#om t#e dealers #a/e esta!lis#ed credit relations#i" s' .f t#ey meet acce"ta!le credit standards% t#e contracts are "urc#ased !y lenders at an interest rate t#at /aries
(it# t#e ris$ le/el of eac# !orro(er% t#e 0uality of collateral "ledged% and t#e term of eac# loan' .n t#e case of dealers selling automo!iles % !usiness and electronic e0ui"ment% furniture% and ot#er dura!le goods% lenders may agree to finance t#e dealers (#ole in/entory t#roug# floor "lanning' *#e lender agrees to extend credit to t#e dealer so #e or s#e can "lace an order (it# a manufacture r to s#i" goods for resale' Dany suc# loans are for +&-day terms initially and may !e rene(ed for one or more &-day
"eriods' .n return f or t#e loan t#e dealer signs a secur ity agreement% gi/ing t#e lending institution a lien against t#e goods in t#e e/ent of non"ayment ' t t#e same time t#e manufacture r is aut#ori>ed to s#i" goods to t#e dealer and to !il l t#e lender for t#eir /alue' Periodically% t#e lender (ill send an agent to c#ec$ t#e goods on t#e dealers floor to determine (#at is selling and (#at remains unsold' s goods are sold% t#e dealer sends a c#ec$ to t#e lender for t#e manufacture rs in/oice amount% $no(n as a ?"ay-assold? agreement' .f t#e
lenders agent /isits t#e dea ler and finds any items sold off for (#ic# t#e lender #as not recei/ed "ayment $no(n as?soldout ofitrust?)%"a yment (ill !e re0uestedi mmediately for t#ose "articular items' .f t#e dealer fails to "ay% t#e lender may !e forced to re"ossess t#e remaining goods and return some or all of t#em to t#e manufacture r for credit' loor "lanning agreements ty"ically include a loan-loss reser/e% !uilt u" from t#e interest earned as !orro(ers re"ay t#eir loans% and is reduced if any loans are defaulted' Ence t#e loan-loss
reser/e reac#es a "redetermine d le/el% t#e dealer recei/es re!ates for a "ortion of t#e interest earned on t#e installment contracts'
COMPETITION IN LENDING BETEEN B!N"S !ND C!PTI#E $IN!NCE COMP!NIES "mong the most aggressive competitors of #anks in granting loans to #usinesses and individuals today are fnance companies. Bet)een *+++ and the !rst quarter of ,. !nance companies/ total assets gre) #y 0, percent% (ust slightly more than U1S1 #anking/s 0* percent asset gro)th over the same time period1 2o)ever% !nance company loans to individuals soared up)ard at more than t)ice the gro)th rate of consumer credit in the #anking sector1 3specially active )ere the 4captive !nance companies4 a5liated )ith large manufacturing companies1 "mong the most visi#le 4captives4 are such familiar names as 6eneral 7otors "cceptance 8orporation $67"8&% 9ord 7otor 8redit% and 63 8apital% )hich% among other activities% provide customer !nancing to promote the sales of their manufacturing parents/ products1 7any of the captives have #ecome giant !rms:for e;ample% 63 8apital has su5cient assets to rank it among the top * U1S1 #anks1 Why have these aggressive #usiness and consumer lenders #een so successful in competing )ith #ankers in recent years<
Key URLs *#e orld ide e! "ro/ides some guidance on analy>ing and granting different ty"es of !usiness loans' or exam"le% t#ere are sites on lending to small !usinesses at ((('s!a'go/7alenders and t#e BCs of Borro(ing at (((' #o(toad/ice'com !orro(ing' *o learn more a!out asset-!ased !orro(ing and international lending see es"ecially ((('factors'net and 9olis'(orld!an$imfli!' orgexternal'#tm'
Some e;perts point to the heavy #urden of federal and state regulation #anks must carry that may retard their gro)th1 =thers point to the fact that captives can package together the purchasing and !nancing of their parents/ products% linking manufacturing and !nance in )ays #anks cannot do1 ndeed% the United States has erected a high )all separating #anking from manufacturing out of fear that allo)ing these t)o industries to amalgamate could )eaken the #anking system1 7oreover% captives are a#le to generate pro!ts at several different points in a typical customer transaction #y manipulating sales prices% terms of credit% and other aspects of the customer-supplier relationship% possi#ly masking some of the costs the customer ultimately pays1 "nd captives can more readily refur#ish and resell any products their customers turn #ack or cannot pay o>1 While #anks must sell the collateral they sei?e from #ad loans in the same markets as captives do% many #ankers are una#le to complete that task e5ciently and at lo) cost1 8aptive !nance companies have esta#lished a solid foothold in the !nancial system and #ankers must !nd ne) )ays to )ork competitively )ith these giant !nancial !rms1
!sset-Based $inan%ing n increasing "ortion of s#ort-term lending in recent years #as consisted of asset-&ased loans'%redit secured !y t#e s#orter-term assets of a firm t#at are ex"ected to roll o/er into cas# in t#e future' @ey !usiness assets used for many of t#ese loans are accounts recei/a!le and in/entories' *#e lender commits funds against a s"ecific "ercentage of t#e !oo$ /alue of outstanding credit accounts or against in/entory' or exam"le% it may !e (illing to loan an amount e0ual to 7& "ercent of a firms current accounts recei/a!le i'e'% all t#ose credit accounts t#at are not "ast due)' lternati/ely% it may ma$e a loan for 4& "ercent of t#e !usiness customers current in/entory' s accounts recei/a!le are collected or in/entory is sold% a "ortion of t#e cas# "roceeds flo( to t#e lending institution to retire t#e loan' .n most loans collaterali>ed !y accounts recei/a!le and in/entory% t#e !orro(er retains title to t#e assets "ledged% !ut sometimes title is "assed to t#e lender% (#o t#en assumes t#e ris$ t#at some of t#ose assets (ill not "ay out as ex"ected' *#e most common exam"le of t#is arrangement is
fa%toring( (#ere t#e lender ta$es on t#e res"onsi!ility of collecting on t#e accounts recei/a!le of one of its !usiness customers' Because t#e lender incurs !ot# additional ex"ense and ris$ (it# a factored loan% it ty"ically assesses a #ig#er discount rate and lends a smaller fraction of t#e !oo$ /alue of t#e customers accounts recei/a!le'
Syndi%ated Loans )SNCs* syndi%ated loan normally consists of a loan "ac$age extended to a cor"oration !y a grou" of lenders' *#ese loans may !e ?dra(n? !y t#e !orro(ing com"any% (it# t#e funds used to su""ort !usiness o"erations or ex"ansion% or ?undra(n%? ser/ing as lines of credit to !ac$ a security issue or ot#er /enture' Lenders engage in syndicated loans !ot# to reduce t#e #ea/y ris$ ex"osures of t#ese large loans% often in/ol/ing millions or !illions of
Key URL .f you (ould li$e to learn more a!out syndicated loans% see es"ecially ((('federal reser/e'go/releases sncdefault'#tm'
54G Part Six Provid ing L oans to Bu sines ses a nd Con sumer s
dollars in credit for eac# loan% and to earn fee income suc# as facility fees to o"en a credit ?line or commitment fees to $ee" a line of credit a/aila!le for a "eriod of time)' Dany syndicated loans are traded in t#e secondary resale) mar$et and usually carry an interest rate !ased u"on t#e London .nter!an$ Effered ;ate L.BE;) on urodollar de"osits' Syndicated loan rates in recent years #a/e generally ranged from 1&& to 4&& !asis "oints o/er L.BE;% (#ile t#e loans t#emsel/es usually #a/e a lig#t to medium credit 0ual ity grade and may !e eit#er s#ort-term or long-term in maturit y' Because of t#e si>e and c#aracter of S=Cs% federal examiners loo$ at t#ese loans care fully% searc#ing for t#ose t#at a""ear to !e classified credits—that is% (ea$ loans t#at are rated% in t#e !est case% substandard, doubtful if some(#at (ea$er% or% in t#e (orst case% an outrig#t loss t#at must !e (ritten off' .nterestingly enoug#% t#e ma9ority of classified S=Cs are #eld !y non!an$ lenders suc# as finance and in/estment com"anies)% (#ic# often ta$e on su!in/estment-grade loans in t#e #o"e of scoring exce"tional returns'
17-5 Long-*erm Loans to Business irms Term Business Loans Term loans are designed to fund longer-term !usiness in/estments% suc# as t#e "urc#ase of e0ui"ment or t#e construction of "#ysical facilities% co/ering a "eriod longer t#an one year' Asually t#e !orro(ing firm a""lies for a lum"-sum loan !ased on t#e !udgeted cost of its "ro"osed "ro9ect and t#en "ledges to re"ay t#e loan in a series of mont#ly or 0uar terly installments' *erm loans usually loo$ to t#e flo( of future earnings of a !usiness firm to amorti>e and retire t#e credit' *#e sc#edule of installment "ayments is usually structured (it# t#e !orro(ers normal cycle of cas# inflo(s and outflo(s firmly in mind' or exam"le% t#ere may !e ?!lind s"ots? !uilt into t#e re"ayment sc#edule% so no installment "ayments (ill !e due at t#ose times (#en t#e customer is normally s#ort of cas#' Some term loan agreements do not call for re"ayments of "rinci"al until t#e end of t#e loan "eriod' or exam"le% in a ?!ullet loan? only interest is "aid "eriodically% (it# t#e "rinci"al due (#en t#e loan matures' *erm loans normally are secured !y fixed assets e'g'% "lant or e0ui"ment) o(ned !y t#e !orro(er and may carry eit#er a fixed or a floating interest rate' *#at rate is normally #ig#er t#an on s#orter-term !usiness loans due to t#e lenders greater ris$ ex"osure from suc# loans' *#e "ro!a!ility of default or ot#er ad/erse c#anges in t#e !orro(ers "osition is certain to !e greater o/er t#e course of a long-term loan' or t#is reason% loan officers and credit analysts "ay attention to se/eral different dimensions of a !usiness customers term loan a""lication3 1) 0ualifications of t#e !orro(ing firms management% 2) t#e 0uality of its accounting and auditing systems% ) (#et#er or not t#e customer conscientiously files "eriodic financial statements% 4) (#et#er t#e customer is (illing to agree not to "ledge assets to ot#er creditors% 5) (#et#er ade0uate insurance co/erage (ill !e secured% 8) (#et#er t#e customer is excessi/ely ex"osed to t#e ris$ of c#anging tec#nology% 7) t#e lengt# of time !efore a "ro"osed "ro9ect (ill generate "ositi/e cas# flo(% G) trends in mar$ et demand%and +) t#e strengt# of t#e customers net (ort# "osition'
Revolving Credit Financing A revolving credit line allo(s a customer to !orro( u" to a "res"ecified limit% re"ay all or a "ortion of t#e !orro(ing% and re!orro( as necessary until t#e credit line matures' Ene of t#e most flexi!le of all !usiness loans% re/ol/ing credit is often granted (it#out s"ecific collateral and may !e s#ort-term or co/er a "eriod as long as fi/e years' *#is
O V E R C OMI N G B A R RI E R ST O S MA L LB U S I N E S S L E N DI N G:
T HE
S MA L L
B U S I N E S S
A DMI N I S T RA T I ONA N DC ON S OL I DA T I N GB A N KS
Small #usiness o)ners for generations have argued that access to loans is one of the most challenging hurdles they face1 The credit markets seem to prefer the largest #orro)ers% )ho usually command the #est terms1 Small #usinesses $)hich num#er close to ,. million in the United States alone& typically have fe)er options for fund raising and often pay dearly for the credit they do o#tain1 This concerns pu#lic-policymakers #ecause small #usinesses create most of the ne) (o#s in the economy1 This apparent size bias in the !nancial marketplace led in the *+.s to creation of the Small Business "dministration to guarantee loans made to small #usinesses #y private lending institutions1 Under the SB"/s popular @$a& loan programs that agency guarantees repayment of small #usiness loans up to a ma;imum of A* million1 $The largest loan currently allo)ed under the program is A, million1& SB" provides credit to nearly @.% applicants annually1 Unfortunately for small #usinesses% ho)ever% the SB" recently tightened its credit rules and raised fees on its guarantees1
f that)asn/t #ad ne)s enough% research evidence suggests that consolidation of the #anking system maybe resulting in a decline in the proportion of all loans devoted to small #usiness1 8ommercial #anks make more #usiness loans than any other !nancial !rm ho)ever% #anks pursuing merger strategies seem to gro) their small #usiness loans more slo)ly than nonmerging institutions1 7oreover% the largest #anks don/t seem to kno) their small #usiness customers as )ell as smaller lenders do1 This may suggest the small #usiness sector could run into a 4credit crunch4 in the future if the #anking sector continues to march to)ard #igger #anks1 2o)ever% some e;perts suggest there may notbe a developing pro#lem here1 While the percentage of #ank loan portfolios devoted to small #usinesses may #e falling the total amount o credit supplied to small !rms may actually #e rising1 9or e;ample% if a #ank/s loan portfolio gro)s from A* million to A, million and the percentage of its portfolio devoted to small #usiness lending falls from * percent to C percent% the total amount of small #usiness credit actually rises—rom A* million $or 1* ; A* million& to A*D million $or A, million ; 1C&1 Thus% the (ury is still out on )hether small #usiness lending is likely to e;pand or decline as the #anking system consolidates further into giant !rms1
form of !usiness financing is "articularly "o"ular (#en t#e customer is #ig#ly uncertain a!out t#e timing of future cas# flo(s or a!out t#e magnitude of #is or #er future !orro(ing needs' ;e/ol/ing credit #el"s e/en out fluctuations in t#e !usiness cycle for a firm% allo(ing it to !orro( extra cas# (#en sales are do(n and to re"ay during !oom "eriods (#en internally generated cas# is more a!undant' Lenders normally (ill c#arge a loan commitment fee eit#er on t#e unused "ortion of t#e credit line or% sometimes% on t#e entire amount of re/ol/ing credit a/aila!le for customer use' Loan commitments are usually of t(o ty"es' *#e most common is a formal loan commitment, (#ic# is a contractual "romise to lend u" to a maximum amount of money at a set interest rate or rate mar$u" o/er t#e "re/ailing !ase rate "rime or L.BE;)' .n t#is case% t#e lender can renege on its "romise to lend only if t#ere #as !een a ?material ad/erse c#ange? in t#e !orro(ers financial condition or if t#e !orro(er #as not fulfilled some "ro/ision of t#e commitment contract' second% looser form is a confirmed credit line, (#ere t#e lending institution indicates its a""ro/al of a customers
re0uest for credit% t#oug# t#e "rice of suc# a credit line may not !e set in ad/ance and t#e customer may #a/e little intention to dra( u"on t#e credit line% using it instead as a guarantee to !ac$ u" a loan o!tained else(#ere' *#ese looser commitments ty"ically go only to to"-credit-rated firms and are usually "riced muc# lo(er t#an formal loan commitments' Ene form of re/ol/ing credit t#at #as gro(n ra"idly in recent years is t#e use of business credit cards. Dany small !usinesses today #a/e come to de"end u"on credit cards as a source of operating capital, t#us a/oiding #a/ing to get a""ro/al for e/ery loan re0uest' .ncreasingly "o"ular is credit-card receivables financing in (#ic# merc#ants recei/e cas# ad/ances and "ay t#em off from t#eir credit-card sales' Anfortunately% t#e interest rates c#arged usually are #ig# and if a "ersonal card is used% t#e !usiness !orro(er (inds u" !eing "ersonally lia!le for t#e !usinesss de!ts'
550 Part Six Prov id ing Loans to Businesses and Consumers
Long-erm !ro"ect Loans *#e most ris$y of all !usiness loans are project loans—credit to finance t#e construction of fixed assets designed to generate a flo( of re/enue in future "eriods' Prominent exam "les include oil refineries% "o(er "lants% and #ar!or facilities' *#e ris$s surrounding suc# "ro9ects are large and numerous3 (1) large amounts of funds% often se/eral !illion dollars (ort#% are in/ol/ed< 2) t#e "ro9ect may !e delayed !y (eat#er or s#ortage of materials< ) la(s and regulations in t#e region (#ere t#e "ro9ect lies may c#ange in a (ay t#at ad/ersely affects "ro9ect com"letion or cost< and 4) interest rates may c#ange% ad/ersely affecting t#e lenders return on t#e loan or t#e a!ility of t#e "ro9ects s"onsors to re"ay' Pro9ect loans are usually granted to se/eral com"anies 9ointly s"onsoring a large "ro9ect' ue to t#eir si>e and ris$% "ro9ect financings are often s#ared !y se/eral lenders' Pro9ect loans may !e granted on a recourse basis, in (#ic# t#e lender can reco/er funds from t#e s"onsoring com"anies if t#e "ro9ect does not "ay out as "lanned' t t#e ot#er extreme% t#e loan may !e extended on a nonrecourse !asis% in (#ic# t#ere are no s"onsor guarantees< t#e "ro9ect stands or falls on its o(n merits' .n t#is case% t#e lender faces sig nificant ris$s and% ty"ically% demands a #ig# contract loan rate' Dany suc# loans re0uire t#at t#e "ro9ects s"onsors "ledge enoug# of t#eir o(n ca"ital to #el" see t#e "ro9ect t#roug# to com"letion' ?Ad
.miirorami 17-1. What special problems d preset to the maa!emet
b"si b"s ,
# # $,%& &'q%&() *+'+#*, crikiitill+#+-.RI/Iio rii0 , i ii =r"iik"/ititi"iTi=0**!E%1D*F1*0**1 u7
.
-
-,,
,
fGIfriiiti'xa*# 35:iig *D i$3f4c3 rTt:(Ift.ivrnii iiia*-*o*ri -%
-
3
%
-
-
4
Loans to Support t5e (cquisition o 6t5er 7usiness Firms *#e 1+G&s and 1++&s us#ered in an ex"losion of loans to finance mergers and ac0uisitions of !usinesses !efore t#ese loans slo(ed as t#e 21st century o"ened' mong t#e most note(ort#y of t#ese ac0uisition credits are LBOs—leveraged buyouts of firms !y small grou"s of in/estors% often led !y managers inside t#e firm (#o !elie/e t#eir firm is under/alued in t#e mar$et"lace' targeted com"anys stoc$ "rice could !e dri/en #ig#er% it is argued% if its ne( o(ners can !ring more aggressi/e management tec#ni0ues to !ear% including selling off some assets in order to generate more re/enue' *#ese insider "urc#ases #a/e often !een carried out !y #ig#ly o"timistic grou"s of in/estors% (illing to !orro( #ea/ily often +& "ercent or more of t#e LBEs are financed !y de!t) in t#e !elief t#at re/enues can !e raised #ig#er t#an de!t-ser/ice costs' re0uently t#e o"timistic assum"tions !e#ind LBEs #a/e turned out to !e (rong and many of t#ese loans #a/e turned delin0uent (#en economic conditions faltered'
17-8 naly>ing Business Loan—""lications .n many !usiness loan situations t#e lenders margin for error is narro(' Eften !usiness loans are of suc# large denomination t#at t#e lending institution itself may !e at ris$ if t#e loan goes !ad' Doreo/er% com"etition for t#e !est !usiness customers tends to reduce t#e s"read !et(een t#e yield on suc# loans and t#e cost of funds t#at t#e lender must "ay in order to ma$e t#ese loans' or most !usiness credits% lenders must commit roug#ly S1&& in loana!le funds for eac# J1 earned after all costs% including taxes' *#is is a modest reward-to-risk ratio% (#ic# means t#at !usiness lenders need to ta$e s"ecial care% "articularly (it# loans of large
View more...
Comments
