Tire City

Lecture Notes- Bank Loans

Types

1. Long-term versus short-term

2. Long-term loans

a. Has maturities of longer than one year

b. Supported by a loan agreement that describes the terms, covenants

c. May be secured by assets owned by the firm or by key officers

d. Maturities today generally max out at seven years.

e. Used to finance long-term growth

3. Short-term loans

a. Generally called lines of credit or revolving credit (revolvers)

b. Used to finance seasonal or short-term needs

c. Generally not supported with a loan agreement

d. Bank has the option to withdraw a line of credit

e. Is self-liquidating by season or year

f. Revolvers can extend beyond one year; not restricted to particular seasonal needs; most popularly convert to a term loan after some period of time

4. The three “C”’s of lending are:

a. Credit worthiness- this is a quantitative determination made by the bank utilizing historical financial ratios to ascertain the company’s financial capabilities, control, forecasting, etc.

b. 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.

c. 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.

5. Fixed rate versus variable (floating rate)

6. Secured versus unsecured. Secured lending, or “asset-based” lending usually occurs because the lender has some reservations about the company’s 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