# HOW MUCH CAN YOU BORROW FROM A BANK?

You’ll be able to virtually borrow anywhere from the bank provided you meet regulatory and banks’ lending criterion. Fundamental essentials two broad limitations from the amount you can borrow from your bank.

1. Regulatory Limitation. Regulation limits a national bank’s total outstanding loans and extensions of credit to a single borrower to 15% of the bank’s capital and surplus, as well as additional 10% of the bank’s capital and surplus, when the amount that exceeds the bank’s 15 % general limit is fully secured by readily marketable collateral. Basically a financial institution may not lend over 25% of its capital to a single borrower. Different banks have their own in-house limiting policies that won’t exceed 25% limit set with the regulators. One other limitations are credit type related. These too alter from bank to bank. As an example:

2. Lending Criteria (Lending Policy). The exact same thing might be categorized into product and credit limitations as discussed below:

• Product Limitation. Banks their very own internal credit policies that outline inner lending limits per loan type according to a bank’s appetite to reserve such an asset during a particular period. A financial institution may prefer to keep its portfolio within set limits say, real-estate mortgages 50%; real estate construction 20%; term loans 15%; capital 15%. Each limit in a certain sounding something reaches its maximum, gone will be the further lending of this particular loan without Board approval.

• Credit Limitations. Lenders use various lending tools to ascertain loan limits. Power tools works extremely well singly or like a mix of more than two. Many of the tools are discussed below.

Leverage. If a borrower’s leverage or debt to equity ratio exceeds certain limits as determined a bank’s loan policy, the financial institution will be hesitant to lend. Whenever an entity’s balance sheet total debt exceeds its equity base, the balance sheet is said to be leveraged. By way of example, if an entity has $20M altogether debt and$40M in equity, it possesses a debt to equity ratio or leverage of just one to 0.5 ($20M/$40M). It is deemed an indicator of the extent which an organization relies upon debt financing. Banks set individual upper in-house limits on debt to equity ratios, usually 3:1 without greater third with the debt in lasting

Cash Flow. A firm can be profitable but cash strapped. Cash flow may be the engine oil of an business. A firm it doesn’t collect its receivables timely, or carries a long and perhaps obsolescence inventory could easily shut own. This is called cash conversion cycle management. The amount of money conversion cycle measures the duration of time each input dollar is occupied in the production and sales process prior to it being changed into cash. The 3 capital components which make the cycle are a / r, inventory and accounts payable.