Banking Services and Relationships

Bank Relationship

A significant factor in the background of a business is its relationship with its bank. Understanding when and how to obtain information from the new or existing customer’s bank can provide the credit executive with a more complete understanding of an account.

What Bank Loans Mean

There are basically two ways a bank lends money: unsecured loans and secured loans. An unsecured loan relies only upon the customer’s promise to pay. Consequently, this form of loan is made only to customers having a good credit standing and the financial ability to repay the loan. A loan granted on a secured basis is generally backed by a personal guarantee or by collateral such as marketable securities or other pledged assets. When a personal guarantee is given, the financial strength of the names backing the notes determines the ability to pay the loan. When collateral is given, the lender usually looks in whole or in part to liquidation of the pledged property in the event that the loan is not regularly paid. A credit executive may, on occasion, come across an account that is considered a prime credit risk, eligible for an unsecured loan, but borrowing on a secured basis. To properly evaluate the credit risk, the executive should discuss the account with the bank to determine the quality of the loan and collateral. It may be that the customer requested such an arrangement in order to obtain a lower interest rate, and thus reduce the cost of carrying the loan.

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