Banks grant loans based on a companys credit history, ability to generate cash, and collateral. Banks see collateral as a secondary source of payment in case a company defaults. Banks calculate borrowing capacity as assets, less ineligible assets. Ineligible assets include (i) loans to officers, directors and employees, (ii) pre-paid expenses, (iii) intangible assets such as patents and copyrights, (iv) goodwill and (v) accounts receivable over a certain age usually 60 to 90 days depending on the bank and the economy. This calculation gives Tangible Assets. Most companies have non-bank liabilities like (i) accounts payable, (ii) accrued payroll, (iii) non-bank leases, (iv) mortgages. Tangible assets less non-bank liabilities equals Tangible Net Worth. Banks multiply Tangible Net Worth times some factor. This factor is often 80% when the economy is good and 70% when the economy is bad, but this factor varies from bank to bank. Tangible Net Worth times this factor is the Borrowing Capacity. Bank debt is subtracted from Borrowing Capacity to find the Remaining Capacity. Bank debt includes things like short and long term bank loans and a line of credit. A line of credit is a short term loan that can be used to finance seasonal costs or some other short term need like a payroll. The Remaining Capacity is the maximum amount that can be borrowed on a line of credit. Complete Bobs Borrowing Capacity Analysis.

Bobs Autoworld Balance Sheet

Assets Cash 60

Accounts Receivable 300

Pre-paid Expenses 10

Loans to Officers 30

Inventory 350

Plant Property and Equipment 400

Patents 10

Goodwill 40

Land 100

Total Assets 1,300

Liabilities

Accounts Payable 210

Accrued Payroll 10

Line of Credit 190

Bank Term Loan 200

Leases, Non-bank 50

Mortgages, Non-Bank 240

Total Liabilities 900

Equity 400 _____

Total Liabilities & Equity 1,300

Bank loan terms: Accounts receivable > 90 days excluded Bank factor 80%

Accounts Receivable Aging:

0 to 30 days 130

31 to 60 days 120

61 to 90 days 40

91 and over 10

Borrowing Capacity Analysis

Total Assets:

Less Ineligible assets:

Tangible Assets:

Less Non-bank Liabilities:

Tangible Net Worth:

x Factor

Borrowing Capacity

Less Bank Debt

Remaining Capacity: