Lecture_12 - FINN 3225 Commercial Bank Management Lecture 12 Evaluating Commercial Loan Requests UNC Charlotte November 17th 2014(UNC Charlotte FINN

Lecture_12 - FINN 3225 Commercial Bank Management Lecture...

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FINN 3225 - Commercial Bank Management Lecture 12 - Evaluating Commercial Loan Requests UNC Charlotte November 17th, 2014 (UNC Charlotte) FINN 3225 - Commercial Bank Management November 17th, 2014 1 / 25
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Fundamental Credit Issues A loan officer should be able to answer the following five questions after analyzing a loan request: 1 What is the character of the borrower and quality of information provided? 2 What are the loan proceeds going to be used for? 3 How much does the customer need to borrow? 4 What is the primary source of repayment, and when will the loan be repaid? 5 What is the secondary source of repayment; that is, what collateral, guarantees, or other cash inflows are available? (UNC Charlotte) FINN 3225 - Commercial Bank Management November 17th, 2014 2 / 25
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Fundamental Credit Issues (cont’d) Character of the borrower Individual’s honesty, integrity, and work ethic typically evidence commitment Look for signals of a borrower’s condition beyond basic income statement and balance sheet data Be aware that management has considerable discretion within the guidelines of generally accepted accounting principles (UNC Charlotte) FINN 3225 - Commercial Bank Management November 17th, 2014 3 / 25
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Fundamental Credit Issues (cont’d) Use of loan proceeds Is loan going to be used for short term working capital needs or for permanent working capital needs? Ensure that the loan is not being used for a speculative asset purchase, unprofitable operation, or illegal activities How much does the borrower need? We don’t want to underestimate the amount required by the borrower; lending only a portion of required funds can reduce borrower’s ability to repay the loan (UNC Charlotte) FINN 3225 - Commercial Bank Management November 17th, 2014 4 / 25
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Fundamental Credit Issues (cont’d) Primary source and timing of repayment Compare projected cash flow from operations with interest and principal payments on prospective loans
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