Lecture_12 - FINN 3225 Commercial Bank Management Lecture...

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

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

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

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

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