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A few illustrations will give further details on these, and show the intricate relationships which are frequently uncovered when examining the applications.

1. Application for a loan of $15,000 was received from the proprietor of a country store located in a Pacific Northwest town with a population of about 100. The applicant owed $6,500 on a real estate mortgage held by an individual-Mr. X. Mr. X, in turn, owed a bank $4,500 and was being called upon for payment, so Mr. X was pressing the applicant to pay his mortgage. The bank to which Mr. X owed the $4,500 was willing to participate in the loan to the extent of 30 percent-the amount which Mr. X owed.

The balance of the $15,000 requested by the applicant was intended to be used as follows:

To pay chattel mortgage.

For accounts payable.

For construction and repairs_

$720 2, 500 5, 280

The collateral offered was considered to be adequate, and no adverse factors were disclosed pertaining to the operation of the business. However, the Agency Manager and the Agency Review Committee recommended declination because 66* * * the loan is primarily for refinancing a real estate mortgage held by (Mr. X), who upon receiving payment will use the proceeds to retire his note held by (a bank). The bank appears to be improving its position by participating in the subject loan."

2. A meat packer in a Southwestern State requested a loan of $165,000 to be applied as follows:

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Examination disclosed that both banks were perfectly satisfied with their existing loans and were not pressing for repayment. They also indicated that they would not participate in any loan RFC might make to the applicant. It was also ascertained that the applicant's accounts payable were current, for the most part, with no creditors pressing for payment. The tax liability for the prior year had already been reduced one-half by quarterly payments. The $15,000 requested to pay the applicant's affiliate was to pay for services performed.

In recommending that the application be declined, the examiner stated, in part, that favorable consideration should be withheld because "the total proceeds of the loan would be used to pay indebtedness, in connection with which there is no undue pressure from creditors."

The applicant had a record of many years of profitable operations. While there was some evidence that withdrawals had been large, the balance sheets and operating statements submitted contained no indications of any unusual financial distress. In view of the foregoing, it is difficult to ascribe a motive for requesting the loan. One is suggested, however, by the disclosure that an executive and principal stockholder of the applicant was reliably reported to be a regular patron of gambling houses in the vicinity, and had, in the past year, borrowed more than $57,000 from the applicant.

3. Applicant is a wholesale dealer in heating, ventilating, and air-conditioning equipment in a large Midwestern city. The requested loan was for $40,000; of this, $13,667 was intended to be used to pay past-due accounts, and the balance was for refinancing of an outstanding BPA loan. The bank participating in the outstanding loan would not consider participating in a new loan.

Disbursements on the outstanding BPA loan had totaled $40,000 but the balance outstanding at the time of the second application was $26,333. The collateral offered to secure the requested loan consisted entirely of real estate pledged against the outstanding loan. Therefore, before the collateral could be accepted on the second application, it would have to be released from encumbrance. The examiner's comments on the purpose of the second request were "100 percent of loan to be applied against present indebtedness. Would be making long-term obligation out of past-due accounts.” The maturity requested was 10 years.

Unacceptable collateral. This reason for declining accounted for only five percent of the declinations by RFC. In the case of banks (see table 3) over 10 per cent of the applications were declined for this reason. Examples follow.

1. A manufacturer of school equipment was denied a loan because the "accounts receivable" which he offered as collateral consisted primarily of orders or contracts, mainly for work to be done and materials to be delivered in the future. The remaining collateral was deemed inadequate to support the $25,000 loan requested. In addition it was found that the applicant's net worth ($11,300) was decidedly disproportionate to its indebtedness ($37,500).

2. A loan of $50,700 was requested by the owner of a trailer park located within the limits of a large city. Collateral offered included the land and improvements thereon. However, it was found that the city had instituted condemnation proceedings against the land, with the object of acquiring it for park purposes. The financial needs of the applicant could have been met by selling part of the land which bordered on a main street, but building permits could not be secured for the lots, and therefore no purchasers could be found. Also, it appeared that the city would issue no further permits for the use of the land as a trailer park. Declination was recommended because of the fact that legal action was being taken with regard to the property offered as security.

Insufficient working capital.—A GI applicant requested a loan of $6,000 to cover the purchase of a service station and cafe which he had been operating for several months. The examiner placed a liquidating, or loan value, of $3,165 on the property. This, together with the VA guaranty of $3,000, brought the total security offered to $6,165, However, the veteran had already borrowed $3,000 from an individual in order to purchase inventory. His working capital position after the RFC loan would have been a minus $625. Other unfavorable factors included a very poor credit record in the locality, the unattractive outside appearance of the service station and cafe, an apparent overstatement of the value of his gas station inventory and other assets, and his lack of experience in the management of this or any type of business.

Miscellaneous reasons for declination.-There have been grouped under this heading those reasons which individually accounted for less than 4 percent of the total as shown in table 6. A few examples will illustrate in detail the considerations involved in each class.

Management factors.-A veteran applied for a GI loan of $5,000 to purchase a cafe. Application declined because applicant has had no experience in running a cafe, nor did he have any experience in managing any type of business. The business judgment of the applicant was questioned because (a) he intended to pay $5,000 for real estate appraised at only $4,000, (b) he proposed to operate as a drive-in, yet parking space was available for no more than four cars, (c) during the past year, the business which applicant proposed to buy had had three different proprietors, none of whom had been able to operate on a reasonably profitable basis.

Insufficient equity capital.-Applicant had purchased a neighborhood grocery store for $11,300, which included real estate, fixtures, inventories, and accounts receivable. Purchase was financed with a $6,800 bank loan plus about $3,100 of personal loans and side arrangements. A loan of $8,500 was requested. Last balance sheet of applicant showed a total debt of $11,516 and a net worth of $2,791. The business normally carries about $3,000 in inventory and $3,000 in accounts receivable. The equity invested in this enterprise was considreed to be too small for the volume of business done, and granting the loan, would solve none of the applicant's problems.

Need for RFC funds not demonstrated.—An applicant requested a loan of $15,000 for a term of 6 years. The proceeds of the loan were intended to be used as follows: $6,000 to finish paying for a furniture manufacturing shop, $5,000 for a note payable, and $4,000 for working capital. Applicant's balance sheet showed a net worth of $118,765 and net working capital of $54,165. Current assets included $15,831 in cash, $23,502 in notes receivable, and $32,978 in inventory. The examiner stated: "In view of applicant's excellent financial condition, it is felt he could use short-term financing available to him at local banks to take care of his requirements; decline is therefore recommended."

Promotional venture.-Application was filed by persons representing a corporation to be formed for the purpose of operating a floating hotel at Charlotte Amalie, V. I. The venture would be started by purchasing a floating hotel located at an east coast port in the United States. The hotel ship was formerly a United States monitor, the keel of which was laid in the early 1870's. It was converted to a floating hotel in 1926. While the hull was basically sound, the hotel was rundown and uninviting because of lax maintenance in recent years.

The operators proposed to acquire the vessel for $35,000, reconditioning it was estimated to cost $83,000, towing to the Virgin Islands would cost $10,000, and installations at Charlotte Amalie were estimated to cost $7,000. It was proposed that RFC lend the $100,000 required for the last three items named. The purchase price and working capital were to be provided by the issuance of 1,000 shares of $1 par value common stock and $60,000 in debentures to be issued to shareholders. Thus, the applicant's investment would be $61,000 compared to the $100,000 to be furnished by RFC. In his comments on reasons for recommending decline, the examiner stressed the disproportionate equity investment and further stated: "Success of the venture would depend on acceptance of this type of accommodation by the tourist trade, which is doubtful and hence the project is speculative."

Borrower not eligible.—Because of a long-standing policy, the RFC does not make or participate in loans to newspapers, magazines, radio stations, and similar enterprises which disseminate information to the general public. The policy was established to avoid subjecting the RFC to the charge of subsidizing the press for political purposes.

Also as a matter of policy, the RFC does not make loans for the purpose of personal investment for income rather than for the conduct of a business enterprise for profit. An illustration of this type is found in the case of an applicant who had purchased a service-station property from a major oil company, giving a first mortgage to the oil company as part payment. Applicant in turn leased the property to the same oil company holding the mortgage. The property also includes a machine shop and a liquor store. The loan requested by the applicant was for the purpose of retriing the mortgage held by the oil company in order that he could lease the service station to a different oil company. This purpose was regarded as a matter of personal investment for income and the application considered to be ineligible under the policy outlined above.

Nonprofit organizations are also ineligible to borrow from RFC, in the opinion of counsel, under the wording of section 4 (a) (1) of the RFC Act, as amended. Purchase of property in excess of appraised value. Two young doctors of medicine applied for a loan of $45,000, of which $34,500 was to be used to purchase realty and improvements for a hospital. The building was constructed 25 years ago for use as a hotel. Present owner purchased the property for $5,000 in 1941 and spent approximately $10,000 remodeling the building into apartments. The applicants proposed to pay $35,000 for the property in its present state, and spend about $13,800 to remodel it into a hospital. The examiner's comments were as follows:

"From information available, the applicants did not make sufficient investigation of the value of the property they proposed to purchase. The property would cost them $35,000, as is, and then they would have to spend all available funds on hand to remodel building at a cost of $13,800. These costs are considered excessive, inasmuch as the remodeling would not materially enhance the value of improvements, since it would be considered a one-purpose building. "Under present conditions, realty and improvements have a reasonable value of $20,000. On the basis of the sales price, it is considered a poor investment on behalf of the applicants."

Lack of cooperation from applicant.-A corporation engaged in the manufacture of organic chemicals applied for a loan of $25,000. In the course of examining the application, the examiner contacted the applicant's bank and found many discrepancies between the information divulged by the bank and that contained in the application filed with RFC. The financial statements submitted with the application were out of date and had not been audited. The president of the applicant refused to make available recent audited reports of the corporation's financial condition and operations. Also, certain complex financial arrangements were found to exist between the applicant corporation, a holding company with identical ownership, and a partnership composed of the wife of the applicant's president and her father. Upon inquiry, the president of the applicant refused to explain the reasons for these arrangements. This attitude caused the examiner to question the good faith of the applicant, so declination was recommended.

SIZE OF LOANS AUTHORIZED

A considerable amount of published comment has recently been devoted to a few relatively large loans that have been made by RFC. The emphasis on these may have partially obscured the fact that more than half of RFC's loans are for $25,000 or less, while only 1.3 percent are for over $1,000,000. In fact,

almost 90 percent of the total number of loans authorized in the past 2 years have been for $100,000 or less, including banks' share of participating loans.

Nobody yet has designed an all-around satisfactory definition for small business and made it stick. But logic and common sense tell us that large concerns would not be apt to borrow in amounts of $100,000 or less, and particularly not from RFC, whose first requirement is proof that the desired funds are not available elsewhere. Indeed, many a loan of $500,000 or $1,000,000 or even a much larger sum, can be thought of as a small business loan, when the borrower's position in his industry is far from being a dominant one.

This point is brought out in a study of the 102 business loans of over $1 million which RFC authorized during 1948 and 1949. Only nine of these firms were listed on the New York Stock Exchange, and a bare one-third of them were to be found in Standard & Poor's or Moody's Industrials. Not one of them could

be considered as enjoying a dominant position in its industry.

In addition, many of these 102 larger loans were made in participation with banks, indicating that local bankers were desirous of furnishing credit to the borrowers, but could not do so because of their own size limitations. Not able to arrange satisfactory correspondent credit, they came to RFC for assistance. In numerous other instances, RFC made a direct loan without bank participation but only because the bank desired-and promised-to furnish shorter-term working capital or inventory credits to the borrower.

TABLE 9.-RFC business loan authorizations 1948 and 1949, by size

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These 8,100 business loans that RFC authorized in 1948 and 1949 were to almost every form of legitimate business enterprise. Table 10 illustrates the diversity of products and services in which RFC credit was employed to raise the productive and distributive levels of the country.

TABLE 10.-RFC business loan authoritzations 1948 and 1949, by type of industry

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It is noteworthy that the largest number of loans in the nonmanufacturing group were to wholesalers and retailers (chiefly the latter), followed by service establishments. In manufacturing, food processing firms led the list, followed by lumber (mostly sawmills), and machinery (typified by the small manufacturing machine shop or tool and die works). These leaders in number of RFC loans all have one thing in common-they are traditionally small business.

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