Case analysis

WHAT CRITERIA DO BANKS USE IN MAKING LOANS?

1. The old four Cs of credit are s t i l l applicable.

a. Character – of the managers of the business

b. Capacity – of the business to repay interest and principal on time

c. Conditions – of the industry and the economy

d. Collateral – that can be used to secure the loan

2. Other factors used are RMA ratio comparisons.

3. Key to remember - banks are lending out depositors' dollars, not our own, therefore must be extremely cautious in making loan decisions.

4. "Gut feel" plays an important role in this process to assess management strength. Various non-financial elements can be important, such as a proprietary product, an important patent or trademark, an extensive distribution system, a strong customer list, a specially designed computer system, etc.