Tire City
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Lecture Notes- Bank Loans
Types
Long-term versus short-term
Long-term loans
Has maturities of longer than one year
Supported by a loan agreement that describes the terms, covenants
May be secured by assets owned by the firm or by key officers
Maturities today generally max out at seven years.
Used to finance long-term growth
Short-term loans
Generally called lines of credit or revolving credit (revolvers)
Used to finance seasonal or short-term needs
Generally not supported with a loan agreement
Bank has the option to withdraw a line of credit
Is self-liquidating by season or year
Revolvers can extend beyond one year; not restricted to particular seasonal needs; most popularly convert to a term loan after some period of time
The three “C”s of lending are:
Credit worthiness- this is a quantitative determination made by the bank utilizing historical financial ratios to ascertain the companys financial capabilities, control, forecasting, etc.
Character- For many bankers, this is the most important requirement. It is a subjective determination of the past history of the borrowers in terms of the trust that others have placed on them in the industry, community, etc.
Cash flow- This is usually based on forecasts prepared by the company and represents their needs and ability to fund repayment of the debt out of operating cash flows over some future period.
Fixed rate versus variable (floating rate)
Secured versus unsecured. Secured lending, or “asset-based” lending usually occurs because the lender has some reservations about the companys ability to repay the loan from operating cash flows. In effect, the lender is lending partially based on the securing of an equity position in certain assets; these may be accounts receivable,