A friend came into your office and said that his bank was out to kill small busi
ID: 2702878 • Letter: A
Question
A friend came into your office and said that his bank was out to kill small businesses. You asked him what he meant by this remark, and he said that he read an article that said his bank had just loaned $10 million to a major automobile manufacturer at a rate of 4 percent, which is less than prime. However, your friend just borrowed $50,000 from the same bank and they charged him prime plus three percent, or 7.5 percent. Your friend has been in business for two years, and last year he had a loss of $2,000. How can you explain this difference in interest rate to your friend?
Explanation / Answer
Well, it's more than just the size of the loan. It is also the risk that the bank is taking that the loan to your friend will not be repaid.
He has been in business for two years and he lost money last year? He is lucky the bank will make him a loan at all. There is a good chance he will not be able to pay it back -- of course they will demand more interest.