What concerns might a loan officer have when loaning funds to a sole proprietorship that he...

What concerns might a loan officer have when loaning funds to a sole proprietorship that he or she might not have when loaning funds to a corporation? Discuss.

Please explain briefly.

Thank you.

Expert Solution

When a loan officer is considering loan to a sole proprietorship then the risk is slightly higher than the loan which is given to the corporations. This is mainly because that corporations have large asset base and their ability to pay back loan is not easily affected by outside factors whereas for sole owner if the outside environment was not conducive for the business then there is high probability of default. When providing loan to sole owners the loan officer has to also consider as to how much amount of loan is apt and not exposed to too much credit risk. The loan officer in the case of corporation can not take over the property of the executives of the company but in the case of sole owner under most of the circumstances the bank can claim the individual property of the owners. The historical financial data for corporations is more reliable than the historical financial data for the sole owners because sole owners does not have to show the data to others so they can maintain it or not, its up to them. The loan officer also has to consider the project feasibility for which the loan is being sanctioned whereas in the case of the corporation, most of them have credit rating and it is easier to access them.

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