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The Loan Committee Process
If you have ever requested a loan for your company from a bank, you probably
have been curious about how the committee process for loan approvals works.
Here's a little insight which may be of help.
Committee Members
The members of a typical bank loan committee can come from various areas in
the bank including the heads of the departments indicated below.
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Credit Department Representative - This person oversees the analysis of your
financial statements and comparative industry data. This person may or may not
have actual lending experience, but probably has extensive experience in credit
analysis.
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Lending Department Representative - This person is responsible for the lending
officers (line officers) who are in direct contact with their customers.
Depending upon how the bank is organized, there may be one or more lending
departments represented, e.g., the Metropolitan, Private Banking, National and
International Departments.
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Credit Policy Representative - This person sets the general and specific
guidelines for prudent lending at the bank, watching, for instance, trends in
delinquencies and charge offs, and concentrations of loans to one industry.
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Executive Management Representative - At smaller banks, the President may sit
on the loan committee. At larger banks, this responsibility may be delegated to
an Executive Vice President or another senior officer of the bank.
Meeting Schedule And Agenda
Loan Committees meet on regular schedules from daily to weekly depending
upon bank size and amount of loan activity. In some banks, the loan request
must go through two or more levels of committee approval, which may include
board members.
An agenda is established prior to the meeting giving a certain time period for
each loan presentation by the lending officer. The agenda may include line of
credit renewals, which typically are required on an annual basis, and new loans
to current and prospective borrowers. A typical presentation will last for
about 5-10 minutes with discussion following for 10-20 minutes. More complex
proposals can extend to 45-60 minutes. Line of credit renewals may take only a
few minutes. Information presented to the committee usually includes a spread
of the prospective borrower's financial statements (balance sheet, income
statement) for the last five years with the most recent interim.
Accompanying the spread are the key financial ratios and cash flow data, and a
subjective analysis of that data prepared by the lending officer or Credit
Department. Most banks have computerized spreading systems which set forth the
company's financial history in a neat, orderly format. The company's financial
ratios may be compared to industry data, such as the Robert Morris Associates
Statement Analysis.
The written loan presentation, which normally is distributed to committee
members prior to their meeting, will include background information on the
company, including products, management and history.
Considerations Of The Loan Committee
The primary considerations of the loan committee in reviewing loan requests
are: 1) ability to repay (cash flow) 2) balance sheet condition 3) collateral
4) management 5) trends and prospects for the future. The spread of the
company's historical financial statements is the most important component when
considering a loan request, since it indicates the ability to repay the loan.
If a positive performance has not been demonstrated, then collateral becomes
the main focus of the committee's discussion. This is not to understate the
importance to the committee of the strength of management and company's
prospects for financial performance.
Nuances Of Loan Committees
Like other committees, loan committees are comprised of dominant members
who ask many of the questions, and who probably influence the decisions of
others. In addition, each member comes with a different background and a
different set of experiences which influence his/her opinions and concerns. For
example, the head of the Credit Department is concerned with the financial
analysis of the borrower and may ask detailed questions about the financial
statement spread. The head of Credit Policy may be concerned about
concentration of loans to one industry or about the proper amount of collateral
securing a loan. The lending officer presenting the loan request wants to build
his or her loan portfolio and, of course, wants to present the borrower in the
best possible light. The senior executive may have to weigh all the factors and
lead the discussion in the right direction.
The Importance Of A Good Lending Officer
Since most or all of the committee members have not met the management team
of the prospective borrower, nor have they visited the borrower's facilities,
the borrower must rely on the lending officer to present its case effectively.
If the financial data is strong, the loan may be approved regardless of the
effectiveness of the presenter. If the financial data is weak, however, it may
take a strong and convincing presenter to get the loan approved. It is
important, therefore, to ensure that your lending officer has a thorough
knowledge of your company's history, its products, management and financial
statements and shares the vision for your company's future.
For more
information about Business Financing at Dollar Bank, click here.
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