Loan Structuring, Documentation, Pricing and Problem Loans

Description

Commercial Loan Structuring
Identify borrowing structures and describe their advantages. Explain the purpose of commercial loan support.

Overview

Commercial lending involves many types of loans—unsecured, secured by collateral, demand and single payment, installment, and term. Knowing the available financing options and matching them to the borrower’s needs and the repayment source is the essence of proper loan structuring.

Once they establish the appropriate borrowing arrangement, the banker and customer negotiate the remaining loan terms. Documenting any loan, and particularly a commercial loan, is a complex process that challenges the skill of even the most experienced business bankers. Although the financial status of the customer is the primary measure of support for any loan, in most cases the bank will require collateral, guarantees, and loan agreements as additional ways to help mitigate risk. And while loan documentation may minimize risk, a business banker should view risk in relation to the potential rate of return on a loan. Therefore, another important factor within documentation and closing is the interest rate or price, plus any fees or other sources of non-interest income.

To properly price a loan, a business banker must know the cost of funds, types of interest rates, sources of fee income, and competition. Once the structure, support, and pricing are determined, and the lender, a credit officer, or a loan committee makes the loan approval decision, the lender then conducts the loan closing.

As a final step in the lending process, and an important one toward the protection of the bank’s assets and profitability, a business banker should be aware of common causes of problem loans and some basic steps for early intervention and resolution. Even a small number of problem loans can adversely impact a bank’s loan portfolio quality and profits, so early detection and resolution steps are critical.

Identifying Viable Secondary and Tertiary Sources of Repayment
Identify sources of repayment that are appropriate for various commercial loan borrowing arrangements and the factors that affect collateral value. Explain key issues for assessing various types of collateral commonly used for commercial loans.

Overview

Many factors beyond the financial analysis are important to managing risk and making commercial loans that are repaid in full and on time. To come up with the proper loan structure, a business banker takes many preliminary steps—interviews with the customer; credit investigation, including calls to suppliers and other creditors; on-site visits; and analyzing financial statements. Most of this provides essential information when deciding whether a customer has both the willingness and the capacity to repay a loan and, therefore, whether to extend a loan.

Commercial lending involves many types of borrowing arrangements—unsecured, secured by collateral, demand and single payment, installment, and term. Knowing the available financing options and matching them to the borrower’s needs and the primary repayment source is the essence of proper loan structuring. Identifying viable secondary and tertiary sources of repayment complements this process.

Once the banker and customer establish the appropriate borrowing arrangement, they negotiate the remaining loan terms, including pricing. Documenting and closing occur next. You will review common loan documents and pricing concepts later in this curriculum.

As a final step in the lending process, and an important one toward the protection of the bank’s assets and profitability, a business banker should be aware of common causes of problem loans and some basic steps for early intervention and resolution. Even a small number of problem loans can adversely impact a bank’s loan portfolio quality and profits, so early detection and resolution steps are critical.

Key Documents, Loan Agreements and Covenants
Describe the loan documentation process and requirements. Explain the best practices for loan closing—preparing, conducting, and following up.

Overview

Many factors beyond the financial analysis are important to manage risk and make commercial loans that are repaid in full and on time. These include proper loan structure, pricing, and other terms. The steps involved in this process include interviews with the customer, credit investigation—including calls to suppliers and other creditors, on-site visits, and analyzing financial statements.

Documenting the lending agreement is as important as the commercial lending process itself. One reason is that there are many types of borrowers. Another reason is that there are many types of borrowing arrangements—unsecured, secured by collateral, demand and single payment, installment, and term. Therefore, a business banker should understand the key documents and how to utilize loan agreements and covenants effectively to control risk.

You will study key loan documents in this course, including appraisals and environmental due diligence related to commercial real estate (CRE) loans, plus loan pricing concepts, common causes of problem loans, and basic problem loan steps later in this curriculum.

Loan Pricing and Negotiating
Describe pricing considerations for a commercial loan. Identify and explain the loan negotiation process, and explain the role of the business banker in the loan negotiation.

Overview

Many factors beyond the financial analysis are important to managing risk and making commercial loans that are repaid in full and on time. These include proper loan structure, pricing, and other terms. The steps involved in this process include interviews with the customer, credit investigation—including calls to suppliers and other creditors, on-site visits, and analyzing financial statements.

Creating an appropriate loan structure brings together all of these efforts. The structure will determine the documentation needed, and also set the stage for establishing the interest rate and other pricing elements. In order to properly price loans, business bankers should know the cost of funds, types of interest rates, sources of fee income, and the competition.

Negotiations traditionally are thought to occur after financial analysis and loan structuring, but they really occur during most of the steps in the commercial lending process. At any point from the initial interview through to the final loan package, the loan may be rejected or loan terms negotiated.

Problem Loans
Identify the costs and causes of problem loans. Detect problem loan warning signs and the steps for resolving a problem loan. Describe the solutions to problem loans—rehabilitation, liquidation, and bankruptcy.

Overview

There are many factors beyond the financial analysis that are important contributors to managing risk and making commercial loans that are repaid in full and on time. These include proper loan structure, pricing, and other terms. The steps involved in this process include—interviews with the customer; the credit investigation, including calls to suppliers and other creditors; on-site visits; and analyzing financial statements.

Documenting the lending agreement is as important as the commercial lending process itself. Documents get tested when a borrower encounters problems, a loan goes into default, and the bank attempts to take legal actions allowed by the documents. Therefore, a business banker should understand the key documents and how to utilize loan agreements and covenants effectively to control risk. In this course you will be studying common causes of problem loans and basic problem loan steps.