CULTURAL BACKGROUND: LOAN APPLICATIONS

wCapital for small businesses is usually provided by banks.In the United States,when a bank loan
officer interviews a small business owner who isapplying for a loan, he or she may try to evaluate
the personal charectreristics of the loan applicant as well as get answers to financial questions. The
personal aspect of the interview is to determine how serious the loan applicant is, as well as his or
her qualities as a businessperson because the loan officer naturally wants to make sure the bank gets
its money back. One aspect of the loan application process in the United States that may vary from
many other cultures is the importance of the personal contact between the loan officer and applicant,
and the loan officers resulting evaluation of the applicant.

CASE

Smith Brothers Building Materials Company, Inc. was founded by Wilbur Smith in 1942. Elmer and
Zachary Smith, the two youngest sons of the founder, have been managing the company since 1985.
All of the company stock is held by a family trust. The company operates six stores throughout the
state of Florida.Two stores are located in Orlando, one in Miami, one in West Palm Beach, one in
Sarasota, and one in St.Petersburg. Smith Brothers employs total of 195 people.
Throughout the years, Smith Brothers has utilized the banking services provided by the First
Federal Bank of Orlando. Unfortunately, however, Zachary Smith has become dissatisfied with his
relationship with First Federal for a variety of reasons, including the high turnover among account
officers. Zachary Smith believes that the level and quality of service received from First Federal has
declined because of this personnel problem. Florida Central, First Federals biggest competitor, has
tried unsuccessfully for years to solicit business, trust, and personal associations from the family and
its business. In light of the current situation, Zachary Smith has been seriously considering
developing a relationship with Florida Central. The companys long history of profitable operations
and the excellent reputation of the current management make Smith Brothers a very attractive
customer for any bank. Although Zachary may be persuaded to develop a relationship with Florida
Central, he intends to maintain relationships with a number of different banks to insure that he
always receives the level and quality of service that he desires.
A Smith Brothers loan application at Florida Central Bank, dated March 12, 1995, requests a
$2.5 million line of credit with the following terms: an interest rate of the national prime rate plus. 3
percent, unrestricted use of funds, and no personal guaranty ( i.e., the Smith Brothers will not be
personally responsible for repayment of the loan if the company is unable to pay it back). Zachary
and Elmer Smith have enclosed a statement expressing the reasons for their request. In this

document, they assert that the loan is needed to meet seasonal working capital needs related to the
building matrials industry. The brothers also indicate that they will increase the amount of their loan
payments during their slow season, when they would have less money tied up in inventory. Financial
statements prepared from the records of the company are also included in the application for
examination by the loan officers.
Although Smith Brothers Building Materials appears to be an excellent company, the loan
officers at Florida Central have requested that Zachary and Elmer Smith meet with them to discuss
the particulars of the loan application.The two Florida Central loan officers, Alexandra Hamilton ad
Joshua Hall, have some reservations about the loan; they would like to gather more information
about the current financial position of the organization and the companys reasons for switching
banks before making any decisions about whether or not to grant the brother request for a loan. The
loan officers must make determination about character of the borrowers, their credit worthiness,
their capacity to repay the loan, and their ability to put up collateral to secure it. After reviewing the
application together, Hamilton and Hall have prepared a number of questions for their interview
with the Smith brothers. While the bank has been courting this familys business for many years, the
loan officers mut negotiate a deal that provides the best possible return for the bank. The loan
officers must balance the benefits of securing the Smith familys business against the potential
profits for the bank.
Hamilton and Hall have compiled the following list of questions and requests for the Smith
brothers. They believe that this line of questioning, along with the additional data requested,will
provide them with enough information to make a good decision concerninig the credit worthiness of
Smith Brothers Building Materials. Student playing the roles of the Smith Brothers should prepare
answers to these questions, which are based on Hamilton and Halls analysis of the Smith Brothers
accounts. These students must study the accounts and prepare an explanation in response to these
questions. Remember that hall and Hamilton will also be evaluating the Smith brotherscharacter
and business sense. Thus, those who play the roles of Zachary and Elmer Smith must appear serious
and be able to answer these questions in a convincing manner.
1. Would it be possible for you to provide us with audited financial statements?
In addition , we would like more detailed information about the subsidiaries.
2. Why have accounts receivable more than doubled in the past year?Have your internal
controls changed? We would also like to examine a current accounts-receivable aging
schedule if possible.
3. Why were assets shifted from cash to marketable equity securities in 1994?
Has your cash management strategy changed?
4. Could you give us an idea of what you intend to do with the loan proceeds?
5. Why did inventory show a drastic increase in 1994?
6. Finally, we would like to discuss the loan terms that you requested in your application. First,
failure to obtain a personal guarantee for a loan violantes bank policy concerning the
extension of credit. Second, the interest rate you requested of prime rate plus. 3 percent
would prevent the bank from recognizing any type of profit. This rate is far too low to be

attractive to the bank. Also, would you object to providing some piece of property as
collateral if the loan committee deems it necessary?
The Smith brothers have been informed of the issues to be addressed in their interview with
the loan officers by a friend employed at the bank. This has enabled them to effectively prepare
for their meeting with Hamilton and Hall.

POINTS FOR DISCUSSION

QUESTIONS AND ANSWERS

JH: Perhaps we should first look at your sales figures for 199__.
They seem flat. Could you explain that?
Zachary Smith(ZS):Yes, I think that I can explain that.
A simple explanation is . . .
JH: Secound, why were assets shifted from cash to marketable equity in 199_? Has
your cash management strategy changed?
ZS: Yes, with falling interest rates and a rise in the stock market, we felt that it was
more advantageous to have some of our assets in securities.
Soliciting Someone Elses Comments or Opinion
JH: Alexandra, do you have any questions?
JH: Alexandra, whats your opinion?
Concluding a Subject
Alexandre Hamilton (AH): Mr.Smith, do you have anything else you want to add?
Interrupting
AH: Excuse me, Mr.Smith, but I have a question.
Moving On
JH: could we go on to question four?
Creating a positive climate
ZS: I think you will agree that .
Stating Preferences
ZS: Wed rather . . . .
Wed prefer to . . . .
Presenting The Other Side
ZS: On the other hand, . . .
We must not forget . . .
However, we must take into consideration . . .
Agreeing
JH: I agree with you [ neutral]
I completely/totally agree with you [strong]