The Management of Business Lending: A Survey

An ISR Business finance & investment study

This is a detailed, comprehensive account of factors affecting performance in business lending.

The study examines the main influences on business lending growth and profitability; reviews new developments in business loan assessment, monitoring, risk management, and pricing; and scrutinizes the nature and reliability of the major forms of business financial information on which lenders actually base their decisions.

Providing a concise, inexpensive guide to sound decision-making and avoiding costly mistakes in this field, the study will be useful to senior executives in business/corporate banking, academic specialists, and banking industry economists and investment analysts.

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1. The Management of Business Lending: an Overview

Introduction* Outline and summary of the main contents of the study*

2. Organizational Aspects of Business Lending and Management

Achieving maximum efficiency in organizing business lending operations, loan marketing, and product-market development*

3. Cultural and Personnel Aspects of Business Lending and Management

Business banking cultures and sub-cultures* Key influences on lending staff productivity/performance* Lending skills and their acquisition*

4. Technology and Efficiency in Business Lending

Technology and competitiveness* Computerized credit scoring and expert systems etc.* The impact of technology on the location of lending functions in banks*

5. Economic Aspects of Business Loan Management

Costs, prices, and productivity* Mergers and concentrations of facilities and resources* Technology economics* Incentive systems* Finance sources* Loss-making activities* Out-sourcing* Market influences on loan prices* Lending risks, pricing, and returns*

6. Lending Risks and Risk Reductions

Major factors affecting* Loan types, sizes, purposes, and lengths (etc.)* Information* Geography, communications, and technology influences* Business, assets and security* Market-economic influences* Specific risks in lending to new businesses, company purchasers, and high-tech and loss-making firms (etc.)*

7. Business Loan Assessment, Monitoring, and Management (1): General

Influences on credit-making decisions* The quality of business-financial information* Assessing levels of risk, costs, and returns* Assessing personal qualities, abilities, and achievements* Assessing business assets, security, and other loan guarantees and safeguards*

8. Business Loan Assessment, Monitoring, and Management (2): Business-Financial Information Requirements and Sources and their Reliability

Types and sources of information and their advantages/limitations* Specific major information requirements relating to profitability, stability and gearing, liquidity, assets, trends, and businesses’ likely cash requirements and income retention policies (etc.)*


Print book

2nd. revised edition 2002. New impression 2011.

ISBN 9780906321188

110 two-column pages


Price £98.95 including free postal delivery


E-book price £16.15 (British pounds 16.15)

E-book ISBN 9780906321591

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Sample passages

In banking and finance generally, globalization has gone furthest in the large corporate sector. The development of new international markets has been an important aspect of general diversification and increased integration in the financial services sector. However, as said, in banking as in other industries, the exigencies of structural-functional specialization, the importance of economies of scale, and other factors limit the scope for diversification on the part of individual institutions.

Newcomers to industries often lack specialist technical expertize and knowledge. It can take many years to build market share and achieve a high output volume. Meanwhile, within companies, there are often problems of effectively integrating new, larger and more complex businesses and cultural differences between different units. These things tend to hamper diversification on the part of particular organizations. Thus, while there have been numerous new products and market developments in banking, organizations have tended to stick to relatively familiar or related fields of activity. Banks have often withdrawn from other, radically different or non-traditional business areas after incurring losses or low returns. Instead, they have learned to concentrate on specific products, services, and sub-markets where they enjoy significant comparative cost and other advantages.

Having decided to “stick to their knitting”, business bankers might still sell non-performing or under-performing assets to improve and maintain profitability. They might sell loans at a discount on secondary markets or dispose of properties and other assets of companies taken as security on failed loans. The market in distressed corporate loans is nowadays large and liquid. On top of this, banks regularly sell redundant and expensive premises they themselves own – along with under-performing subsidiary companies… (page 24)

Standardized information and formats in credit files and generally simple credit packages are also useful. These make for greater consistency and reduced errors and costs in credit procedures. There will be less need for significant re-inputting and reviewing of information at different points and stages in the process. A certain minimum amount of paperwork is necessary for making informed decisions. However, the elimination of various intermediate steps will free up scarce and costly loan officer time and enable the concentration of resources on higher value added products, front-end services, and final decision-making.

Established clear responsibilities for performing particular functions, defined standards and policies, and overall integrity of credit making are of enduring importance in all organizations. Banks often assign special integrative functions to single individuals or units. However, to some extent all the members of organizations concerned with business credit – not just senior head office executives or specialist lending personnel – are and have to be involved in general integration… (page 30)

Sophisticated computer software programs are available nowadays to simulate and evaluate loan decision-making processes. These programs necessarily entail a substantial amount of individualized self-learning as opposed to participation in conventional formal group courses. There is also plethora of other resources for self-training. It is common to use computer-assisted learning tools or facilities in conjunction with model cases, activity-based workbooks, and libraries of printed and audio-visual information on credit management, accounting and financial management, related subjects, and individual industries.

Individual mentors might be involved in ongoing individualized training and supervized on-the-job experience. Experienced bankers are used to assisting newcomers. Sometimes, there will be formal provision of peer facilities and special support networks.

After completing initial classroom courses, banks may assign trainees to jobs in loan review or credit administration areas. Here they might work on financial spreads and credit memoranda (etc.) and generally improve their analytical skills. Thereafter, they could move on to fieldwork. Calling on firms can teach bank staffs a lot about business in general, particular industries and markets, and specific management and economic factors affecting credit risk (etc.).

As part of their on-the-job learning, junior personnel might be involved in preparing quarterly reviews of companies, doing pro forma loan work, and making initial loan recommendations. Eventually, trainees should become directly involved in loan making on their own and in cooperation with experienced loan officer colleagues. Thereafter, banks might lay-on refresher courses and provide for periodic post-training credit skills assessments or tests of lending abilities… (pages 35-36)

Developments in ICT have made these and other transfers and concentrations of facilities/functions possible. Transmitting loan applications documents to central support units instead of processing them locally has reduced costs at branch level and enabled staff previously engaged in loan assessing and servicing in back offices to redeploy to front office selling or other revenue-generating jobs. Both banks and their customers have benefited from improvements in service and response times resulting from the speedier completion of loan processing through centralization and automation.

Over the years, there has been substantial automation of application screening, document preparation, and volume reports generation etc. Technology has reduced processing time all down the line – from inputting of applications, through credit investigation and scoring, to preparing and sending out approval/decline letters. Technology aside, experienced lending officers in central units have often been able to process applications faster and more accurately than their local branch counterparts have – simply because of their greater specialization and expertize… (page 42)

Banks often hold prices down for high-risk businesses when they consider they have good long-term prospects. They are also wary of putting up loan costs for relatively price sensitive businesses likely to take their custom elsewhere. In some cases, banks compensate for initial low- or under-charging on loans by getting more business from relationships and/or increasing prices in the future.

Sometimes, the risks are so high as to make debt an altogether inappropriate method of business finance. Rather than agreeing to further credit, banks may insist that businesses reduce their current indebtedness. However, cutting off finance to heavily indebted businesses is not always desirable. Sometimes, it is less costly and risky to increase credit (at least temporarily) rather than curb it.

As an alternative to high-risk and distress lending and/or seeking higher lending returns and security safeguards, banks may go for dividends and potential capital games from investments. They may prefer to be equity investors rather than creditors in new ventures or substitute risk capital for loan capital in existing businesses.

Average interest rate returns from bank lending tend to be significantly lower than the returns for supplying equity finance. For companies, net dividend payments on shares are often a lot lower than net interest rates on loans – at least in the short-to medium-term. Equity investments carry higher risks of failure and total loss of capital. However, shareholdings in growing and profitable companies provide investors with perpetual revenue streams and offer opportunities for making capital games. The costs of making equity investments are also often much lower than those of rising business loans… (page 50)

The risk of lending to businesses involved in speculative activities tends to be high during both economic booms and slumps. As noted, banks will often refuse to lend money for purely speculative trading purposes (e.g. buying simply to re-sell at a higher price). However, banks themselves are often major speculative traders in commodities and financial instruments and derivatives. Some speculation performs very useful business financial functions. Futures dealings can greatly reduce price fluctuations in certain markets. This greater orderliness in markets and earnings will reduce uncertainty and risk all around. Moreover, a certain amount of speculation is a standard feature of capitalist business enterprise generally. Speculative production, investment, and trading occur across-the-board in industry and commerce – from production engineering, construction, and pharmaceuticals research and development, through derivatives trading in financial markets, to the management of blue-chip company finances in general. Some speculation is akin to gambling and can cause heavy financial losses as well as gains. However, other speculation reduces lending and investment risks. It does this by flattening out gross market-price fluctuations, compensating for falls in mainstream earnings and existing asset values, and generally improving the returns on companies’ financial reserves and investment holdings… (pages 68-69)

Around the world, modern banks require security for significant loans to enterprises of all kinds – small owner-managed businesses, medium-sized firms, and large incorporated companies. However, there are some significant and persisting international differences. In Britain, banks’ security requirements have traditionally been comparatively high. Some commentators argue it would be better for the economy if British banks had a more risk-oriented, less security-oriented approach to business lending. However, there is a highly developed separate risk capital market in Britain. The stock market and private/venture capital are far more important here than in continental Europe. In countries such as Germany and France, functionally diffuse banks finance large, high-risk, and long-term development projects that in Britain and America the advanced specialist risk capital sector funds. .. (page 86)

Visits to premises are not just a means of getting a good, quick overall impression of particular businesses and help in elucidating proposals or validating the facts behind their figures. Visits can help in improving banks’ general understanding of business operations and local industry. They can also assist banks in marketing and building fruitful, ongoing relationships with business clients. Banks often take the opportunity of visits to explore sales possibilities for new business services.

Regular visits can help maintain and strengthen business-banking relationships on both sides. However, as said, there are problems with visits as sources of information on which to base lending decisions. They involve significant amounts of staff time, and the costs may simply not be justifiable in terms of the size of the loan and the likely returns. There is also a danger of superficiality. Visits may reveal very little about the general or underlying state of affairs of firms – especially in the case of large, diversified, multi-site companies. Finally, there are inherent limitations in face-to-face discussions and verbal information exchanges. Beyond physical communication problems, there are often difficulties in actually comprehending and remembering data. .. (page 107)