I received an email from a website visitor the other day, and I thought it was an interesting enough topic to write a post about it. The visitor works as a commercial lending assistant to a couple of lenders for a small community bank, and ends up doing the analysis for their business loan requests. The problem he is having is that most of the commercial loan requests were being denied once they got to the Credit Committee. He wanted to know how to increase his success rate.
Although it could very well be that most of those borrowers were not bankable, and that the underwriting might be lacking, to continue working that way is usually counterproductive since the visitor mentioned that he can spend up to a week putting a loan package together just to get it shot down in a couple of minutes during committee by a ruthless Chief credit officer. I think that what the visitor has is a situation of failing to get the credit officer to buy-in, and provide support and feedback at an earlier stage in the process.
One of the ways the buy-in / feedback process has been handled in banks that I am familiar with is to conduct (Pre-approval meetings) with the credit officers. This way, the credit officer not only gets to participate in the vetting process at an earlier stage, but also provides feedback about changes to the structure that he thinks are needed to make a weak loan request into something that he can support. Your chances of success at getting the loan approved go up substantially if you have Credit on your side.
Doing pre-approval memos is a timesaver approach. Most of the work that the commercial credit analyst does for the memo can be used with the final loan underwriting, and most importantly the loan request gets the tentative buy-in effect from Credit. Just like a Credit Approval Memorandum, there is no standard memo format. However, there are three items that must be covered (Borrower, Facility & Background). The following is a rough draft of the areas that need to be covered in the memo:
1) Borrower identification and background
Borrower Name / Address: Self explanatory
Business Owner(s) & Officer(s): Might want to throw in information about the experience of the owners/officers here. Experience is a big plus when talking management.
Company Background: This is important. The reader needs to know how the business makes money, and how long they have been at it. Other important information such as customer concentration should be noted here.
2) Subject loan structure and terms
Proposed Facility: Is this a line of credit for working capital? An equipment loan? An owner occupied commercial mortgage?
Term & Amortization: Self explanatory.
Loan Purpose: What is being financed?
Collateral: How is the bank going to secure the loan?
Guarantee(s): Who will guarantee the loan?
Interest Rate / Fees: How much are we going to make from this loan?
3) Financial information
Financial Highlights: For the purposes of the pre-approval memo, I like to keep this simple. In the income statement, noting the trends for revenues and profitability might be enough as long as the reasons for any increase or decrease are noted. On the balance sheet, comments about the capital structure (leverage) should do the job.
Debt Service Calculation: Can the borrower repay the proposed loan?