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Chapter 17: Q.11 (page 426)

Why are banks more willing to lend to wellestablished firms?

Short Answer

Expert verified

The reason behind the banks more willing to lend to wellestablished firms is they are able to repay the loans with interest on schedule.

Step by step solution

01

Concept introduction

Firms that have been successful for a long period are known as well-established firms.

02

Explanation of solution

When a bank lends money, it checks the four C's of credit.

Complementary (business assets which can be liquidated in case of non payment),

Capital (the owner's money, cash, and personal possessions), Capacity (the ability to repay money), and Character (good credit rating)

This is a crucial checklist for determining a company's legitimacy. If the company is unable to repay the loan, the bank will suffer a significant loss. To avoid a bad situation, banks prefer to lend to well-established businesses that can meet all of the criteria.

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