You have just accepted your first job out of college, which requires you to evaluate loan requests at Beach Front National Bank. The person training you at the bank, Jim Baker, uses a loan request received from Surfer Dude Supplies, a small
proprietorship. Marty Monroe, the owner, is requesting $75,000. Jim tells Marty that all they consider before making a decision on the loan request is an accurate set of financial statements. Do you think this an accurate statement on the loan request process? What other considerations or information likely are part of the decision-making process by the bank?
In general, the decision to extend a loan is based upon an assessment of the profitability and riskiness of the loan. Although the financial statements provide useful data for this purpose, other factors such as the following might also be significant:
· The due date and payment terms of the loan.
· Security for the loan. For example, whether Marty Monroe is willing to pledge personal assets in support of the loan will affect the riskiness of the loan.
· The intended use of the loan. For example, if the loan is to purchase real estate (possibly for a future building site), the real estate could be used as security for the loan.
· The projected profitability of the company.
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