chapter 6

Lending to business firms and
pricing business loans
Chapter 6: Lending to business firms and pr 1

icing business loans
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

Types of Loans

ST: Self-Liquidating Inventory Loans
(Cho vay mua hàng dự trữ)
• Used to finance the purchase of inventory

• Take advantage of the normal cash cycle
inside a business firm
• Peak seasons !
• <90 days

Cash cycle ( Chu kỳ tiền mặt)
Cash
borrow
Cash Buy
received ! inventories
Goods on Produce
sales goods
ST: Working capital loans
(Cho vay vốn lưu động)
• Working capital is the money available to

operate the immediate and short-term
needs of your company
= current assets minus current liabilities
> provide businesses with short-run credit,
lasting from a few days to about one year.
(Similar to Self-liquidating loan)
> Collateral: Account receivable / inventories

• Compensating deposit balances ( số dư
bù trừ) :Requiring deposits a customer
must keep with a lender as a condition for
getting a loan.

ST: Interim construction financing
(Cho vay công trình xây dựng)
• Used to support the construction of
homes, apartments, office buildings,
shopping centers, and other permanent
structures.

ST: Security dealer financing
(Cho vay kinh doanh chứng khoán)
• Purchase new securities and carry their

existing portfolios of securities until they
are sold to customers or reach maturity

ST: Retailer and equipment financing
(Cho vay bán lẻ và mua sắm thiết bị)
• Lenders support installment purchases

of automobiles, home appliances,
furniture, business equipment, and other
durable goods by financing the receivables
Borrower
Bank Dealer

ST: Asset-based loans
(Cho vay được đảm bảo bằng tài sản)
• Credit secured by the shorter-term assets

of a firm that are expected to roll over into
cash in the future.
• Particularly accounts receivable and
inventory

• Factoring: Sale of the shorter-term assets
of a business firm that are expected to roll
over into cash in the near term, such as
accounts receivable and inventory, in
order to raise more working capital.

ST: Syndicated loans
(Cho vay hợp vốn)
• A loan or line of credit extended to a

business firm by a group of lenders in
order to reduce the credit risk exposure to
any single lending institution.

LT: Equipment purchasing
(Cho vay mua máy móc thiết bị)
• Funds longer-term business investments,

such as the purchase of equipment or the
construction of physical facilities, covering
a period longer than one year.
• Secured by fixed assets

Important factors on business
application
(1) qualifications of the borrowing firm’s management
(2) the quality of its accounting and auditing systems,
(3) whether or not the customer conscientiously files periodic financial statements,
(4) whether the customer is willing to agree not to pledge assets to other creditors,
(5) whether adequate insurance coverage will be secured,
(6) whether the customer is excessively exposed to the risk of changing technology,
(7) the length of time before a proposed project will generate positive cash flow,
(8) trends in market demand
(9) the strength of the customer’s net worth position.

LT: Revolving credit finance
(Cho vay tuần hoàn)
• Allows a customer to borrow up to a pre-specified

limit, repay all or a portion of the borrowing, and re-
borrow as necessary until the credit line matures
• Loan commitment fee:
– Formal loan commitment: is a contractual promise by a
bank to lend to a customer up to a maximum amount of
money at a set interest rate (or rate mark up over prime or
LIBOR). The only way the bank can renege on its promise
is if there has been a "material adverse change" in the
borrower's financial condition.
– Confirmed commitment line: indicates banks’ approval,
though the price of a credit line not be set

LT: Project loans
(Cho vay dự án)
• Credit to finance the construction of fixed

assets designed to generate a flow of
revenue in future periods
• The most risky !!

Properties of Long-term project loans
• Large amounts of funds

• May be delayed by weather
• Laws and regulations in the region
• Interest rates may change

LT: Loans to support acquisitions of other
business firms(Cho vay hỗ trợ hoạt động M&A)
• Finance for mergers and acquisitions

• LBOs – Leverage Buyouts (mua lại và sáp nhập
doanh nghiệp bằng nguồn tài chính đi vay):
is the purchase of a publicly traded company by
a small group of investors. These investors
often borrow very heavily to finance the
purchase of the stock of the company.

1 Short-term lending to support the
construction of homes, apartments, office
buildings, shopping centers, and other
permanent structures is known as a (or an):
A) Self-liquidating
B) Working capital loan
C) Interim construction loan
D) Asset-based loan
2. A credit agreement in which a business
customer may borrow up to a pre-specified
limit, repay all or a portion of the borrowing,
and reborrow as necessary until the credit
line matures is known as a (an):
A) Interim construction
B) Project loan
C) Working-capital loan
D) Revolving line of credit
3. A government security dealer requires
credit to add new government securities to
his security portfolio. What type of loan is
this?
A) Self-liquidating inventory loan
C) Security dealer financing
4. Credit is extended to a company up to
one year to purchase raw materials and
cover a seasonal peak need for cash. What
type of loan is this?
A) Self-liquidating inventory loan
C) Security dealer financing
5. Mary Williams needs to purchase a new
bulldozer and excavator for her construction
business and wants to repay the loan over the
next three years in regularly scheduled
payments. What type of loan does Mary need?
A) Term business loan
B) Revolving credit financing
C) Long term project loan
D) LBO loan
6. The Ford Motor Company needs to borrow $50 million. The
First National Bank creates a packaged loan with several
other banks to lend to Ford Motor Company. This loan
package can be sold on the secondary market and carries a
rate that is 500 basis points above LIBOR. The First National
Bank expects this loan package to ultimately be held by a
finance company looking for a good return on their money?
What type of loan is this mostly likely to be?
D) Syndicated loan
7. The Wabash Washing Machine Company has
arranged to get a loan from their bank over the next
five years. They can borrow up to a pre-specified limit
and repay it as many times as they need until the loan
matures. The Wabash Washing Machine Company has
not pledged any specific collateral for this loan. What
type of loan is this mostly likely to be?
• A) Term business loan
• B) Revolving credit financing
• C) Long term project loan
• D) LBO loan
8. The management of the Frickel Frontier Freight
Company wants to take the company private by
borrowing money and using the proceeds of the loan to
purchase the shares of the company in the market.
Management believes they can increase revenues
enough to be able to pay off the loan. What type of loan
is management getting?
D) LBO loan
ANALYZING BUSINESS LOAN
APPLICATION

• Reward-to-risk ratio (tỷ lệ lời-lỗ): Lending
institutions must take special care on large
loans.
• Lenders finds 2 or 3 sources of repay funds:
– Profits ; Cash flows
– Collateral assets
– Strong balance sheets with ample marketable
assets and net worth.
– Guarantees given by the business

Explanation
• Marketable securities/assets (chứng

khoán/ Tài sản khả mại) : are securities
or debts that are to be sold or redeemed
within a year
• Net worth (Giá trị tài sản ròng): is the
amount by which assets exceed liabilities

Attention !
• Lenders must diversify geographically,

across different markets and different
firms!

Analysis of a Business Borrower’s
Financial Statements
• Based on financial statements (Balance

sheets, Income statement, Cash flow
statement).
• Number displayed in both figures and
percentage figures (common-size ratios)
• COMPARE!!

Financial Ratio Analysis of a Customer’s
Financial Statements

(1) The Business Customer’s Control over Expenses
(2) Operating efficiency in using resources to generate sales
(3) Marketability of product line;
(4) Coverage that earnings provide over financing cost;
(5) Liquidity position, indicating the availability of ready cash;
(6) Track record of profitability;
(7) Financial leverage

The Business Customer’s Control
over Expenses
• How carefully it controls its expenses

• How well its earnings to repay a loan

The Business Customer’s Control
over Expenses
• Wages and salaries/Net sales

• Overhead expenses/Net sales
• Depreciation expenses/Net sales
• Interest expense on borrowed funds/Net
sales
• Cost of goods sold/Net sales
• Selling, administrative, and other
expenses/Net sales
• Taxes/Net sales
Operating Efficiency: Measure of a Business
Firm’s Performance Effectiveness
• How effectively are assets being utilized to

generate sales.
• How efficiently are sales converted into
cash?

Operating Efficiency: Measure of a Business
Firm’s Performance Effectiveness
• Annual cost of goods sold/Average

inventory (or inventory turnover ratio)
• Net sales / Net fixed assets
• Net sales/Total assets
• Average collection period =
Accounts receivable ÷ (Annual credit sales ÷
360)

Marketability of the Customer’s
Product or Service
• Gross profit margin (GPM)
• Net profit margin (NPM)

Coverage Ratios: Measuring the
Adequacy of Earnings
• Refers to the protection afforded

creditors based on the amount of a
business customer’s earnings.

Coverage Ratios: Measuring the
Adequacy of Earnings
• Interest coverage
• Coverage of interest and principal payments
• Coverage of all fixed payments

Liquidity Indicators for Business
Customers
• Reflects his or her ability to raise cash in

timely fashion at reasonable cost,
including the ability to meet loan payments
when they come due

Liquidity Indicators for Business
Customers

Profitability Indicators
• Before-tax net income ÷ total assets, net

worth, or total sales
• After-tax net income ÷ total assets, net

worth, or total sales

The Financial Leverage Factor
• Refers to use of debt in the hope the

borrower can generate earnings that
exceed the cost of debt, thereby
increasing potential returns to a business
firm’s owners

The Financial Leverage Factor

1. The most common sources that lenders
look to for repayment of business loans
include all of the following except:
A) The borrower's cash flow
B) Assets pledged as collateral
C) Relatives of the borrower
D) The borrowers net worth

2. When analyzing the financial statements of
a business, a credit analyst will look for ratios
in which of the following categories:
A) Profitability.
B) Coverage
C) Efficiency
D) All of the above

3. Term loans normally are secured by:
A) Fixed assets
B) Accounts receivable
C) Inventories
D) Personal property

4. A bank that wants to examine the liquidity
of a borrower would most likely examine
which of the following ratios?
A) Costs of Goods Sold/ Average inventory
B) Income Before Interest and Taxes/
Interest Payments
C) Cost of Goods Sold/ Net Sales
D) Current Assets/ Current Liabilities

5. A bank wants to examine whether the
borrower can raise cash in a timely fashion to
pay bills that are coming due. This bank
would most likely examine which of the
following categories of ratios?
A) Customer's Control over Expenses
B) Customer's Liquidity
C) Customer's Operating Efficiency
D) Customer's Profitability
6. A bank wants to examine the adequacy of a
business customer’s earnings based on the
coverage ratios. They are most likely to look at
which of the following ratios?
A) Wages and Salaries/Net Sales
B)Accounts Receivables/(Annual credit
sales/360)
C) Net income after taxes/Net Sales
D) Income before interest and taxes/Interest
payments
7. A bank feels that a firm has expenses that
are too high. What ratio are they most likely
to examine to address this concern?
A) Selling and administrative expenses/Net
sales
B) Net sales/Total assets
C) Current assets-Current liabilities
D) Net income/Total assets
8. A bank wants to examine the financial
success of a company by examining the
profits of a company. What ratio will help the
bank examine this issue?
A) Selling and administrative expenses/Net
sales
B) Net sales/Total assets
C) Current assets-Current liabilities
D) Net income/Total assets
COMPARING A BUSINESS CUSTOMER
TO ITS INDUSTRY

Some originations….
• Dan and Bradstreet industry norms and

key business ratios
• RMA Annual statement studies

Contingent liabilities
(Khoản nợ tiềm ẩn)
>> Potential claims against the borrower

• Contingent liabilities
• Environmental liabilities
• Unfunded pension liabilities

Contingent liabilities
• Usually not shown on customer balance

sheets are other potential claims against the
borrower that loan officers must be aware of:
– Guarantees and warranties behind the business
firm’s products.
– Litigation or pending lawsuits against the firm.
– Unfunded pension liabilities the firm will likely owe
its employees in the future.
– Taxes owed but unpaid.
– Limiting regulations.
Environmental liabilities
• Is a new contingent liability.

• Environmental Risk Assessment Program

Unfunded pension Liabilities
• When a company pays its pensions

obligations to staff out of current income
rather than from a separate fund to which
it has contributed over time.

Preparing Statements of Cash Flows from
Business Financial Statements

Statement of Cash flows
• Usually readily available from borrowers.

• Provide insights into how and why a firm’s
cash balance has changed and very
important!

• Will the borrower be able to generate
sufficient cash to support its production
and sales activities and still be able to
repay the lender?
• Why is the cash position of the borrower
changing over time and what are the
implications of these changes for the
lender?

Cash flows by Origin
Net Cash Flow from Operations (focusing

upon the normal flow of production,
inventories, and sales) =
+ Net Cash Flow from Investing Activities
(focusing upon the purchase and sale of
assets)
+ Net Cash Flow from Financing Activities
(including the issuance of debt)

Operating Cash Flow measure
(Direct method)
= Net Cash Flow from Operations +

Noncash Expenses (measured on a cash,
not an accrual, basis)
= Net Sales Revenue - Cost of Goods Sold
-Selling, General and Administrative
Expenses Taxes Paid in Cash + Noncash
Expenses 1especially depreciation)

Indirect Operating Cash Flows Measure
• Net Income+ Noncash Expenses+

Losses from the sale of assets - Gains
from the sale of assets- Increases in
assets associated with operations+
Increases in current liabilities associated
with operations- Decreases in current
liabilities
associated with operations + Decreases in
current assets associated with operations
Pro Forma (Estimated) Statements of
CFs and Balance sheets
• A pro forma statement of cash flows

estimates the borrower’s future cash
flows.
• Supposed to provide insight into the future
cash flows of the borrower and its ability to
repay the loan.
• (Table 17-10)

Exercise
• Pecon Corporation has placed a term loan request with its

lender and submitted the following balance sheet entries
for the year just concluded and the pro forma balance
sheet expected by the end of the current year.
• Construct a pro forma Statement of Cash Flows for the
current year using the consecutive balance sheets and
some additional needed information:
• The forecast net income for the current year is $225
million with $50 million being paid out in dividends. The
depreciation expense for the year will be $100 million and
planned expansions will require the acquisition of $300
million in fixed assets at the end of the current year.
COMPARE and RELAX

Pricing Business Loans

Methods….
• The Cost-Plus Loan Pricing Method

• The Price Leadership Model
• Below-Prime Market Pricing
• Customer Profitability Analysis (CPA)
• Earnings Credit for Customer Deposits

17-84
Pricing Business Loans
• One of the most difficult tasks in lending is

deciding how to price a loan
▫ Lender wants to charge a high enough interest rate to
ensure each loan will be profitable and compensate the
lending institution for the risks involved
• The Cost-Plus Loan Pricing Method

icingCopyright
business©loans
2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
The Price Leadership Model
(Mô hình dẫn đầu giá cả)
Prime rate (Lãi suất cơ bản) / Based / Reference rate :
– Is the lowest rate charged the most creditworthy

customers on the short-term loans.
– is reserved for only the most qualified customers,

determined as those who pose the least amount of risk of
default.

1. Loan interest rate: Interest charged
2. Base / prime rate: Lãi suất cơ bản (Bao gồm cả
lợi nhuận kỳ vọng của NH và chi phí quản lý)
• Markup: The risk premiums attached to loans
are often referred to collectively as the markup.
> Default-risk premium: Phần bù rủi ro mất
khả năng thanh toán
> Term-risk premium: Phần bù rủi ro kỳ hạn
Example
• A company could be charged the loan

interest rate is 12% included:
* Prime interest rate: 8%
* Default-risk premium: 2%
* Term-risk premium: 2%

Floating prime rate
• Due to inflation and more volatile interest rates. 2
types:
1. The prime-plus method
2. The times- prime method
• For example, a borrowing corporate customer
might be quoted a short-term prime-plus-2 loan
rate of 12 percent when the prime rate stands at
10 percent. Alternatively, this customer might be
quoted a 1.2 times prime rate, that is,
Loan interest rate = 1.2 (prime rate) = 1.2 (10
percent) = 12 percent
LIBOR –based loan rate
• During the 1970s, the prime rate as a base

for business loans was challenged by
LIBOR—the London Interbank Offered
Rate

What is LIBOR?
• is the basic short-term rate of interest in

the Eurodollar market (khoản tiền gửi
bằng đôla Mỹ tại các ngân hàng nước
ngoài)
• the rate to which many Eurodollar loans
and deposits are tied
• at which banks offer to lend money to
other banks.

Below-Prime market pricing
(Định giá dưới cơ sở)
• Many banks announced that some large

corporate loans:
– covering only a few days or weeks
– would be made at low money market interest
rates
– plus a small margin cover risk exposure
– and provide a profit margin.

Customer Profitability Analysis (CPA)
• Assumption that the lender should take the
whole customer relationship—all revenues
and expenses associated with a particular
customer into account when pricing a loan

• Tỷ lợi lợi nhuận ròng trước thuế từ mối quan hệ với
khách hàng
• Lợi nhuận từ khoản vay và các dịch vụ khác cung cấp
cho khách hàng
• Chi phí do việc cung cấp khoản vay và các phí dịch vụ
khác
• Số vốn vay ròng được sử dụng vượt quá tiền gửi của
khách hàng

In which…..
• Revenues: loan interest, commitment fees, fees for cash

management services, and data processing charges
• Expenses: wages and salaries of the lender’s employees,

credit investigation costs, interest accrued on deposits,
account reconciliation and processing costs and funds’
acquisition costs
• Net loanable funds: are the amount of credit used by the

customer minus his or her average collected deposits
(adjusted for required legal reserves)
• If the calculated net rate of return is positive:
approved!
• If the calculated net return is negative: may be
denied or the lender may seek to raise the loan
rate or increase the prices of other services
requested by the customer in order to continue
the relationship on a profitable basis
• Customers perceived to be more risky are
expected to return to the lender a higher
calculated net rate of return.
Earnings Credit for Customer
Deposits
• Is a discount a bank gives a depositor on

the depositor's bank fees.
• A company can save a lot of money with a
bank that offers an ECR.
• The bank also benefits from this in that it
encourages the customer to keep larger
balances in its accounts.

Exercise 1 (CPA)
• Finch Corporation is a new business client for First Commerce National

Bank and has asked for a one-year, $10 million loan at an annual interest
rate of 6 percent. The company plans to keep a 4.25 percent, $3 million
CD with the bank for the loan’s duration. The loan officer in charge of the
case recommends at least a 4 percent annual before-tax rate of return
over all costs. Using customer profitability analysis (CPA) the loan
committee hopes to estimate the following revenues and expenses which
it will project using the amount of the loan requested as a base for the
calculations:

Approve or not this application?

RELAX 

Quizz
1. According to the cost-plus model for pricing

loans, factors that should be considered in pricing a
loan include:
A) The marginal cost of raising loanable funds to
support the loan request
B) Non-funds operating costs
C) An appropriate margin to compensate the
bank for default risk.
D) The bank's desired profit margin
E) All of the above
2. The business loan pricing method that
includes the non-funds operating costs of
making a loan plus the bank's desired profit
margin is:
• A) The Cost-Plus Loan-Pricing Method
• B) The Price Leadership Model
• C) The Markup Model
• D) Customer Profitability Analysis

3. The business loan pricing method that
estimates the total revenues a loan will
generate, the net amount of loanable funds the
bank must turn over to the borrower, and the
before-tax yield expected from the loan is the:
A) The Cost-Plus Loan-Pricing Method
B) The Price Leadership Model
C) The Below Prime Rate Pricing Model
D) Customer Profitability Analysis
4. Suppose a business borrower is quoted a
loan rate of two percentage points above the
prevailing prime interest rate posted by
leading U.S. banks. This is an example of the:
A) Times-prime pricing method.
B) Market-based pricing method.
C) Cost-plus loan-pricing method.
D) Prime-plus pricing method.

5. A bank has determined that its marginal cost
of raising funds is 4.5 percent and that its non-
funds costs to the bank are 0.5 percent. It has
also determined that its margin to compensate
the bank for default risk for a particular customer
is 0.30 percent. It has also determined that it
wants to have a profit margin of 0.3 percent. If
this customer wants to borrow $10,000,000, how
much in total interest costs will this customer pay
in one year?
6. A bank has a prime rate of 6 percent for
its best customers. It has determined that
the default risk premium for a particular
customer is .4% and the term-risk premium
for this loan is .25 percent. If this customer
wants to borrow $5.0 million from the bank,
how much in interest will this customer pay
in one year?

7. The bank has determined the information
below for one of its customers. This
customer wants to borrow $1,000,000 but
will maintain an average deposit balance in
its account of $200,000. What is the
expected net rate of return on this loan?
Expected Revenues Expected Costs
Interest Revenues $1,000,000 Deposit Interest $30,000
Cost of Other Funds
Commitment Fee $15,000 Raised $890,000
Deposit Service
Fees $5,000 Loan Processing Costs $8000
Activity and Record
Agency Fees $6000 Keeping Costs $16,000
8. A firm submits their financial records to a bank.
Upon examination, the bank discovers that this
firm has $500 in cash, $2500 in accounts
receivables, $1000 in inventory, $5000 in plant and
equipment and that their assets totaled $9000. In
addition this bank discovered that the firm had
$2000 in current liabilities, $2500 in long term debt
and $4500 in net worth. Finally this bank
discovered that this firm had $20,000 in net sales
and $2000 in net income. What is this firm’s net
working capital?
Upon examination, the bank discovers that this
firm has $500 in cash, $2500 in accounts
receivables, $1000 in inventory, $5000 in plant and
equipment and that their assets totaled $9000. In
addition this bank discovered that the firm had
$2000 in current liabilities, $2500 in long term debt
and $4500 in net worth. Finally this bank
discovered that this firm had $20,000 in net sales
and $2000 in net income. What is this firm’s
leverage ratio?
Upon examination, the bank discovers that this firm
has $500 in cash, $2500 in accounts receivables,
$1000 in inventory, $5000 in plant and equipment and
that their assets totaled $9000. In addition this bank
discovered that the firm had $2000 in current
liabilities, $2500 in long term debt and $4500 in net
worth. Finally this bank discovered that this firm had
$20,000 in net sales and $2000 in net income. What
is this firm’s acid test ratio?

ANSWER
1. E
2. A
3. D
4. D
5. $560,000
6. $332,500
7. 10.25 percent
8. $2000
9. 50%
10. 1.5
Cost-plus requires the bank to estimate the total cost involved in making a loan
and then adds to that cost estimate a small margin for profit.
pricing
price leadership A method for setting loan rates that looks to leading
lending institutions to set the base loan rate
below-prime Interest rates on loans set below the prevailing prime
pricing rate, usually based on the level of key money market
interest rates (such as the current market rate on
Federal funds or Eurodollar deposits)
customer A method for evaluating a customer's loan request
profitability that takes into account all revenues and expenses
analysis associated with serving that particular customer and
calculates and expected net return over all costs
incurred from serving the customer


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Lending to business firms and

pricing business loans

Chapter 6: Lending to business firms and pr 1

• Types of Business Loans: Short-Term and

Chapter 6: Lending to business firms and pr 3

Chapter 6: Lending to business firms and pr 4

• Used to finance the purchase of inventory

Chapter 6: Lending to business firms and pr 5

• Working capital is the money available to

Chapter 6: Lending to business firms and pr 7

Chapter 6: Lending to business firms and pr 8

Chapter 6: Lending to business firms and pr 9

• Purchase new securities and carry their

Chapter 6: Lending to business firms and pr 10

• Lenders support installment purchases

Chapter 6: Lending to business firms and pr 11

• Credit secured by the shorter-term assets

Chapter 6: Lending to business firms and pr 12

Chapter 6: Lending to business firms and pr 13

• A loan or line of credit extended to a

Chapter 6: Lending to business firms and pr 14

• Funds longer-term business investments,

Chapter 6: Lending to business firms and pr 15

(2) the quality of its accounting and auditing systems,

(5) whether adequate insurance coverage will be secured,

(8) trends in market demand

(9) the strength of the customer’s net worth position.

Chapter 6: Lending to business firms and pr 16

• Allows a customer to borrow up to a pre-specified

Chapter 6: Lending to business firms and pr 17

• Credit to finance the construction of fixed

Chapter 6: Lending to business firms and pr 18

• Large amounts of funds

Chapter 6: Lending to business firms and pr 19

• Finance for mergers and acquisitions

Chapter 6: Lending to business firms and pr 20

Chapter 6: Lending to business firms and pr 29

Chapter 6: Lending to business firms and pr 30

• Marketable securities/assets (chứng

Chapter 6: Lending to business firms and pr 31

• Lenders must diversify geographically,

Chapter 6: Lending to business firms and pr 32

• Based on financial statements (Balance

Chapter 6: Lending to business firms and pr 33

Chapter 6: Lending to business firms and pr 36

(2) Operating efficiency in using resources to generate sales

(3) Marketability of product line;

(4) Coverage that earnings provide over financing cost;

(5) Liquidity position, indicating the availability of ready cash;

(6) Track record of profitability;

(7) Financial leverage

• How carefully it controls its expenses

Chapter 6: Lending to business firms and pr 38

• Wages and salaries/Net sales

• How effectively are assets being utilized to

Chapter 6: Lending to business firms and pr 41

• Annual cost of goods sold/Average

Chapter 6: Lending to business firms and pr 42

• Gross profit margin (GPM)

• Net profit margin (NPM)

Chapter 6: Lending to business firms and pr 44

• Refers to the protection afforded

Chapter 6: Lending to business firms and pr 46

• Coverage of interest and principal payments