What is the process for commercial loan application and approval?
The process each bank follows will vary, but the following is fairly typical:
1. Relationship Manager (RM) finds potential deal.
2. RM discusses deal with his sales manager and gets a quick go/no decision.
3. If it’s a go, then the RM will request supporting documents from the borrower. At a minimum, this usually includes: 2 years of tax returns for both the business and the guarantors, a personal financial statement for each guarantor, a current financial statement for the business (may be CPA prepared), accounts receivable listing (for commercial businesses), rent roll and project renderings (for real estate), and any other document that will support the loan request.
4. After receipt of documents, the lender will hand off the deal to a credit analyst who is responsible for underwriting the loan.
5. The analyst will put together an internal document that typically includes the following:
A summary of the loan request
Amount, Term, Rate, Guarantors, What the company is going to use the funds for, etc.
Information about the company
Who are the principals, how long has it been in business, what do they do, what is their relationship to the bank, etc.
What are the prevailing trends in the industry, how does this company compare to other companies in their industry, who are their competitors, what is the industry outlook, etc.
Repayment Analysis (This is the most important section):
In this section, the credit analyst will take all of the financial data that they have received and make an attempt to estimate the company’s ability to repay the loan. This includes analyzing past data, looking at growth trends, industry trends, proposed loan terms, and certain assumptions that will get them to a number called the DSCR or Debt Service Coverage Ratio. The DSCR is the company’s free cash flow divided by the estimated debt service on the proposed loan. For a real estate loan, the process is the same, but the analyst will look at the cash flow being generated by the property in question by constructing a proforma, sometimes using a software.
Company/Borrower Financial Analysis
This section will explore the financial statements of the proposed borrower. It will look at historical trends, critical ratios, and interim data to determine the financial health of the borrower.
Individual/Guarantor Financial Analysis
Many bank loans require the individual guarantee of the company principal(s). As such, an analysis is performed on each of the individuals who will be guaranteeing the loan, analyzing their ability to cover any shortfalls in the debt service should things not go as planned. The focus here is usually on guarantor liquidity or how much cash they have in the bank, other contingent liabilities, and excess personal cash flow.
This analyzes the customer’s relationship with the bank. Are they a current customer? Do they have deposits? What other loans are outstanding?
6. Once the credit analyst has completed the loan approval document, it will be given to the relationship manager for review. Typically there will be 2 or 3 rounds of tweaking.
7. With the analyst and the relationship manager on the same page, they will present the loan approval document to the credit officer for approval. Again, it is common for there to be more tweaks and internal discussions to shape the deal into something that the credit officer is comfortable with.
8. Once the credit officer has approved it, the relationship manager will send a term sheet to the borrower, outlining the bank approved structure of the proposed loan. The Borrower may attempt to negotiate certain points of the deal, but usually doesn’t have a lot of room to work with. If the Borrower accepts the terms of the loan, they will sign the term sheet and the bank will issue a commitment letter.
9. Once the term sheet has been signed and the bank has issued a commitment, the loan will be routed to either the bank’s internal loan operations area or to an attorney for the preparation of the loan documents.
10. Once the loan documents are prepared and the borrower has reviewed them, the bank and the borrower will meet to sign them and the loan process is complete.