If a bank loan officer were considering a company\'s request for a loan, which o

Question

If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?
Select one:
a. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.
b. The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.
c. Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.
d. Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.
e. The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.

Explanation / Answer

Answer :

d. Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.

Explanations:

Firstly we have an idea about what is Dept ratio?

Debt ratio is a solvency ratio that measures a firm's total liabilities as a percentage of its total assets. In a sense, the debt ratio shows a company's ability to pay off its liabilities with its assets. In other words, this shows how many assets the company must sell in order to pay off all of its liabilities.

The formula for Dept ratio is: Total liabilities / Total assets.

The debt/equity ratio is considered a key financial metric because it indicates potential financial risk.

NOTE:We have to study the Bank statements for an approval of New Company/Business to solve these type of questions.

Explanations about Bank statements for New loan

The most fundamental characteristics a prospective lender will want to examine are:

Before you apply for commercial credit, you should review a credit report on your own business, if your business has been in existence for a while. You can obtain a free Business Information Report on your own business from Dun & Bradstreet, by calling 1-800-234-3867. If D&B does not yet have any information on you, they will allow you to voluntarily obtain a listing by providing them with some basic information about your business.

2. CASH FLOW                                                                                                                         The cash flow from your business's operations — the cycle of cash flow, from the purchase of inventory through the collection of accounts receivable — is the most important factor for obtaining short-term debt financing. A lender's primary concern is whether your daily operations will generate enough cash to repay the loan. In addition, cash flow shows how your major cash expenditures relate to your major cash sources. This information may give a lender insight into your business's market demand, management competence, business cycles, and any significant changes in the business over time.

3. COLLATERAL

Collateral may be defined as property that secures a loan or other debt, so that the property may be seized by the lender if the borrower fails to make proper payments on the loan.When lenders demand collateral for a secured loan, they are seeking to minimize the risks of extending credit. In order to ensure that the particular collateral provides appropriate security, the lender will want to match the type of collateral with the loan being made.Because a creditor wants to have a priority claim against the collateral being offered to secure the loan, the creditor will search the public records to make sure that prior claims have not been filed against the collateral. If the collateral is real estate, the search of public records is often done by a title insurance company. The company prepares a "title report" that reveals any pre-existing recorded secured interests or other title defects. If the loan is secured by personal property, the creditor typically runs a "U.C.C. search" of the public records to reveal any pre-existing claims. The costs of a title search or a U.C.C. search is often passed on to the prospective borrower as part of the loan closing costs.

4. CHARACTER

The weight given to a lender's assessment of a borrower's character can vary tremendously between lending institutions and between individual lending officers. Many small businesses have found more success "selling" their reputation and good character to smaller community banks who may be more directly affected by the economic health of the surrounding community.                                          The following traits are typically cited as important to a bank's consideration of your character:

references from professionals (accountants, lawyers, business advisors) who have reviewed your proposals,and community involvement

In addition, evidence of a borrower's care and effort in the business planning process suggests that the borrower is committed and confident about the new business proposal.               

5 .LOAN DOCUMENTATION FOR START UPS

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