Securing your initial business loan infuses cash into your business and helps pave the way for growth. Hopefully, your growing company can look to the same lender for additional funding in the future. Understanding the nuances that shape the post-lending process will keep you in step with your lender and increase the odds of being approved for additional funds.
Admittedly, underwriters constantly monitor the borrower’s business performance to eliminate risks and ensure that loan funds are being used appropriately. Periodic reviews act as pointers to the overall financial health of a business. Borrowers who are interested in building lasting and worthwhile credit relationships should be open to periodic updates with lenders, which minimize concerns the latter may have regarding the business’s operations.
What should you keep an eye on in your attempt at improving your lending relationship with your lender? Here’s an inside scoop of the loan officer’s role to help you get money for your business and determine what the lender is looking for in an annual review.
#1 Cash Flow Analysis
Your firm’s cash flow has a significant impact on your ability to repay loans. Underwriters have a keen eye on a business’s financial performance and by conducting a cash flow analysis, they ascertain the firm’s likelihood of fulfilling its obligations to the lender or the risk of defaulting on their loans. Manage your firm’s operating and investment activities prudently to ensure a positive cash flow and profitability, which is the source of funds for the firm’s financing activities such as loans. Similarly, a positive cash flow relays information regarding your business’s health and improves your standing with a lender.
Should contingent liabilities arise prior to an underwriter’s review, ensure to openly discuss the bottlenecks and weigh alternative options available to help you meet the loan obligation. In so doing, your candor and willingness to keep repaying the loan conveys a positive message to the lender, who may consider adjusting the repayment schedule in your favor. Moreover, it builds your rapport with the lender and increases the potential for securing additional funding in future.
#2 Trend Analysis – An Important Marker of Growth
The essence of business is growth. A lender conducts a trend analysis during annual reviews to ascertain the strides that a business has made over time. The underwriter evaluates various financial ratios such as income, profitability and working capital. A positive trend indicates that your business has signs of asset growth and positive growth. A business’s performance, relative to its competitors or the industry in general, provides the underwriter with an understanding of the level of credit risk they perceive in your company.
#3 Site Visits
Often, borrowers offer their business assets as collateral for loans. Periodic site visits by an underwriter provides a hands-on approach to understanding a project’s progress. Through a description of your business in terms of fluctuations in collateral and its operating state, an underwriter determines the likelihood that your business will be a going concern and the level of credit risk it poses.
In case you sought an asset-based loan and need additional funds, the loan officer recalculates your collateral to ascertain whether you qualify. By cooperating with underwriters, you paint a picture of sincerity and can discuss your prospects with the lender or clarify changes in your business. That way, your chances of securing additional funding improve.
#4 Covenant Testing
A financial covenant is a lender’s tool for managing lending risk and knits together both parties to a loan. Covenant testing allows the loan officer to figure out areas of compliance or non-compliance. Financial covenants are crafted to nurture, not ruin, the lending relationship. As such, they provide some leeway, or elasticity if you may, that acts as a cushion to lenders or borrowers in case of contingencies. Do not hesitate to highlight trouble spots in your business that could keep you from adhering to the covenant.
Always keep the lender in the loop throughout the life of the loan as a sign of your understanding of their interest and the value your business derives from the existing lender-borrower relationship. While conducting covenant tests, a lender factors in the value of the relationship with the borrower. The tests are not punitive; rather, they address emergent issues.
Overall, underwriters play a facilitative role in the lender-borrower relationship. By following the insider tips discussed, you will be on the same page with your lender and can reduce being perceived as a risky borrower.