Tip #1 – Using annual commercial loan reviews to establish a good lending relationship
Borrowers are used to having little contact with a lender after they receive the funding that they requested. Some of the smartest businesses with a true funding strategy actually typically go against the “take the money and run” norm of the majority of borrowers. For anyone looking to have ongoing access to capital, it is much better for a business to stay in meaningful communication with the lender periodically. What lenders won’t tell you is that they are quietly keeping a close eye on their borrowers through periodic loan reviews.
The annual loan review is a “behind the scenes” administrative process in which banks analyze loans in their portfolio, one by one, to make sure that they keep an eye on the performance of the businesses they have extended a loan to. Annual credit reviews have become so important over the recent years that financial regulators expect banks to put mechanisms in place to enable them conduct annual credit reviews of borrowers of commercial loans. One easy way for a business to establish a good lending relationship is to put their best foot forward during for the annual loan review process that the banks are conducting on a business. A borrower may never know the exact timing of the loan review but consistent communication and following of the tips below will be good practices over the long term.
Tip #2 – Prepare and submit financial statements
One of the most critical components of an annual loan review is obtaining and analyzing the current financial statements from the borrower. The financial statements help to provide the lender with the overall financial performance of the borrower. Where the financial performance is satisfactory it is usually an indicator that the borrower made sound decisions for how to use the money. This leads to higher ratings from the lender, which in turn boosts a good relationship with the lender. The lender becomes more comfortable in offering credit to the borrower if there are subsequent requests for loans. With this knowledge in mind, the borrower should take the first steps in ensuring that their financial statements are in order by preparing and submitted financial statements to the lender in advance for review. Analysis of financial statements may also be expected of the guarantor. This will help the lender understand the financial condition of the guarantor because the guarantor may be called upon in future to fulfill his obligations under the loan agreement. Borrowers would therefore help themselves by ensuring that financial statements of their guarantor are prepared (by a finance professional or CPA) and are promptly submitted to the lender for review. Being proactive and preparing financial records helps to build a good relationship with the lender.
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Tip #3 – Arrange for site visits by the lender
Site visits performed during annual loan reviews may serve a number of purposes. One such purpose is to inspect the current condition and state of the collateral that was pledged to support the loan. It could also be that the lender is inspecting the status of the business or the project that the borrower sought financing for. For example, if the borrower invested in commercial real estate, the site visit by the lender would want to establish whether all the units are occupied. During the site visit the lender’s underwriter would also want to review receipts given for rent paid to establish whether the project is generating revenues. Borrowers would therefore be advised to organize annual site visits where the lenders get to inspect the projects they financed. If the project is doing well, the lender will have full confidence that the borrower used the loan prudently and would therefore not hesitate to offer financing for a subsequent time.
Tip #4 – Prepare and promptly submit credit reports
During the annual loan review, credit reports of the borrower are reviewed by comparing them to those of past years. What lenders will most likely look at when doing credit reviews is to analyze the service of debts in prior years. The borrower should therefore ensure that not only his personal credit report to be prepared but also ensure that all long term debt reports that have analyzed and compared results with past years have been prepared and submitted to the lender’s underwriter for review. Where these reports show a positive performance by the borrower’s business, it will lead to a good relationship with the lender.
Tip #5 – Prepare risk reports with backup plans
Risk reports will describe risks that may arise during the loan repayment period. In the event that a source of repayment is unavailable due to financial risks, it would be a smart move for the borrower to include a secondary source of repayment. This would serve to assure the lender that the borrower has put in place of all the necessary contingency measures to ensure that the loan will be repaid.