Therefore, whether or not collateral is required for a loan, they set loan limitations and restrictions to protect themselves against unnecessary risk and at the same time against poor management practices by their borrowers.
Often some owner/managers consider loan limitations a burden. Yet others feel that such limitations also offer an opportunity for improving their management techniques.
Especially in making long-term loans, the borrower as well as the lender should be thinking of:
- The net earning power of the borrowing company,
- The capability of its management,
- The long range prospects of the company, and
- The long range prospects of the industry of which the company is apart. Such factors often mean that limitations increase as the duration of the loan increases.