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MGT602 - Entrepreneurship - Lecture Handout 34

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BANK LENDING DECISIONS

BANK LENDING DECISIONS

1. Banks are very cautious in lending money, particularly to new ventures.

  1. Commercial loan decisions are made only after the loan officer does a careful review of the borrower.
  2. Decisions are made based on quantifiable and subjective judgments.

2. Bank lending decisions can be summarized by the five C’s-Character, Capacity, Capital, Collateral, and Conditions.

  1. Past financial statements are reviewed in terms of key ratios and the entrepreneur’s capital invested.
  2. Future projections on market size, sales, and profitability are evaluated.
  3. Intuitive factors-Character and Capacity-are also taken into account and become more important when there is little or no track record.

3. The loan application format is generally a "mini" business plan.

  1. This provides the loan officer with information on the creditworthiness of the individual and the ability of the venture to repay the loan.
  2. Presenting a positive business image and following procedure are important in obtaining the funds.

4. The entrepreneur should borrow the maximum amount possible that can be repaid, as long as the prevailing interest rates and terms are satisfactory.

  1. Care must be taken to ensure that the venture will generate enough cash flow to repay the interest and principal on the loan.
  2. The entrepreneur should evaluate the track record and lending policies of several banks in the area.

SMALL BUSINESS ADMINISTRATION LOANS

A. When an entrepreneur is unable to secure a regular commercial bank loan, an alternative is a Small Business Administration (SBA) Guaranty Loan.

  1. The SBA guarantees that 80% of the loan will be repaid to the bank by the SBA if the company can’t pay.
  2. This allows the bank to make loans that have higher risks.
  3. This procedure is the same as for securing a bank loan, except that government forms and documentation are required.

B. Both long and short-term loans can be guaranteed by the SBA.

  1. A maximum loan period of 15 years on existing buildings and 20 years on new con- struction can be obtained.
  2. For inventory, equipment, or working capital, a maximum of 10 years is available, although five years is the usual.
  3. Once the application has been filled out, it usually is processed within 15 days.
  4. There are additional reporting requirements beyond those for a conventional bank loan.
  5. Since there is no difference in interest rates charged between conventional bank loans and SBA-guaranteed loans, a commercial bank loan is usually better.
  6. A good banking relationship is very valuable as the venture grows.

C. For most SBA loans, there is no limit to the amount of loan money requested, but there is practical limit of $1 million.

  1. The vast majority of small businesses are eligible for financial assistance from the SBA.
  2. As defined by the Small Business Act, a small business is independently owned and operated and not dominant in its field of operation.
  3. The size limits of a small business vary from industry to industry.
  4. The proceeds of the loans can be used for almost any business purpose.
  5. The interest rates are negotiated between the entrepreneur and the bank, but there are subject to SBA maximums.

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