Banks make money by giving out loans at certain interest rates. The bank’s profit comes from the return it makes on those loans.

Businesses need capital to fund their operations, but not all businesses have the cash to cover their expenses. Commercial loans offer a viable funding solution. Think of these loans as a type of debt-based loan in which a business acquires capital as a form of debt from a lender.

To protect themselves, lenders or banks put loans through an analysis process. During the process, they determine whether or not there’s a good chance of the loan being repaid.

What Banks Look for When You Apply for a Commercial Loan

Many banks focus on the same areas during the commercial loan analysis. Whether you’re applying for a line of credit for business working capital, a loan for equipment, a commercial short-term loan or any other type of commercial loan, your application will be put through a series of analyses.

The Credit Analyst

The credit analyst is the number cruncher. They analyze the information gathered by your relationship manager or the person you approach at the bank for the loan and it’s all put into a loan approval document. The document outlines the benefits and risks of approving your loan along with the feasibility of repayment.

If your commercial loan is approved, both you, the credit officer, and the relationship manager will sign this document.

The Repayment Analysis

This is an important part of your loan application. During the analysis, the credit analyst takes all the necessary financial data and tries to estimate your ability to repay the loan. This includes:

  • Analyzing past data
  • Industry trends
  • Growth trends
  • Proposed loan terms

This process also includes assumptions that will get the lender to a number called a Debt Service Coverage Ratio (DSCR). This is your free cash flow that’s divided by the estimated debt service on the loan.

The Borrower’s Financial Analysis

During this part of the commercial loan analysis, the lender will explore your business’s financial statements, looking closely at critical rations, interim data, and historical trends to determine your financial health.

Individual Financial Analysis

Some commercial bank loans require the guarantee of the company principals. As a result, an analysis is performed on each person who will guarantee the loan. The analysis looks at their ability to cover shortfalls should things not go to plan. The key in this process is how much the individuals have in the bank along with excess personal cash flow.

The Relationship Analysis

This part of the analysis looks at your relationship with the bank, for example, whether or not you’re a current customer, if you have deposits, and if any other loans are outstanding.

When the credit analyst has completed your loan approval document, they pass it on to the relationship manager for approval. There are usually a few rounds of edits before it is finalized.

Some lenders also require you to submit a breakeven analysis which usually takes the form of a financial graph or statement. This analysis shows how your business’s expenses will match the service or sales volume.

Approving Your Commercial Loan

Once the relationship manager and credit analyst are happy with the contents of your loan approval document, they’ll hand it over to the credit officer for approval. Again, there may be a few rounds of edits to finalize details. Once that’s done, the relationship manager and credit officer will sign the document.

Once your loan request is approved, you’ll receive a term sheet that outlines the structure of the proposed loan. You can try to negotiate some points of your loan, but there’s not often much room to work with. If you accept the loan terms, you can sign the term sheet and the bank will issue you with a commitment letter.

The loan is then routed to an attorney to prepare the loan documents for you and your bank to sign. A commercial loan is usually a substantial amount of money and you should never try to negotiate loan terms or even sign a loan approval until you’ve had a professional lawyer advise you on the best way forward for you and your business.

Book a consultation to discuss your commercial loan analysis today at Malamut & Associates LLC.

 

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