Commercial Lending: Theory vs. Actual Practice
Ruzicka, James A., Jr.
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The purpose was to come to a better understanding of the commercial lending process by comparing, among three different size commercial banks in the greater Chicago and Rockford areas of Illinois, the actual process of commercial lending to the "theory" that undergraduates are taught. The project's narrow scope, when needed, was the above comparison as it relates to commercial middle market term loans. The "theory" consists of the Six "C's" of Credit and financial ratio analysis. The three different size categories of commercial banks were categorized on assets as those: up to $300 million, from $300 million to $1 billion, and $1 billion and up. One commercial lending officer at each of the 15 banks was interviewed. Each was asked to rank and to explain their ranking of both the Six "C's" of Credit, and a list of ten ratios found to be the most important among commercial lenders in 1983. Findings on the six "C's" revealed that commercial lenders do not use them per se, but that lenders were able to identify: character, capacity and collateral as the top three areas. Findings on the 1983 list of financial ratios revealed that commercial lenders now rank cash flow ratios first instead of third. The other primary ratio identified was debt/equity. In general, commercial lenders at smaller banks believed they understood their customers better than lenders at larger banks. However, lenders at larger banks maintained that this was only a perception due to various reasons. Lenders at smaller banks do not rely on financial ratio analysis as much as lenders at larger banks.