Key Monitoring Tools and Criteria for Business Loans

Business lending has risks. Two of the key risk areas for business lending include: 1. The adequacy of monitoring the performance of the portfolio of business loans and how to recognize business loans that become troubled and 2. Monitoring the adequacy of the underwriting of business loans from the perspective of the financial capacity of the business to repay the loan.

Ensuring that business loans are adequately decisioned at the “front-end” of the business loan process and the adequacy of the monitoring of business loans after the business loans are granted is vital to the success of any business lending program to ensure compliance with business loan regulations, ensuring that loss risks are adequately mitigated and that business loan portfolios are serving the membership.

For many lenders with long-time "seasoned" business loan portfolios, these criteria are already in place but for lenders with start-up business loan programs or lenders with business loan portfolios that are not performing to the level desired, these key criteria are among the most important factors that must be in place for the business loan portfolio to perform well and serves as a refresher for veteran business lenders and as a guideline for newer business lenders.

Covered Topics:

  • How business loans need to be monitored and who should monitor business loans.
  • The two key criteria that should be closely monitored in every business loan: 1. The financial capacity of the business loan to be repaid and 2. The adequacy of the risk rating for the business loan.
  • The importance of monitoring the cash-flow of business loans and how to determine if the cash-flow is being adequately calculated.
  • What is DSCR and GDSCR? (Debt Service Coverage Ratio and Global Debt Service Coverage Ratio)
  • Important business lending underwriting criteria that require monitoring and review including factors that need to be better documented in component sections of business loan write-up used to track the ongoing condition of the business.
  • Monitoring and review of key underwriting factors often overlooked regarding business loan appraisals including discounting the appraised value of business property that will secure the business loan, cash-flow trends, and importance of monitoring these trends ongoing during the life of the business loan as well as monitoring key documents that should be obtained (property insurance, borrower insurance, etc.) and more.
  • Discussion of the 12 key financial ratios of businesses and how these ratios are calculated. In addition, the need to monitor and review business ratios to ensure that the appropriate business loan ratios are being adequately documented and updated in the business loan file.
  • Monitoring and review of the adequacy of the business loan risk rating model.
  • Monitoring the adequacy of the Business Loan Watch List Factors and ensuring that key factors are included in the Business Loan Watch List.

Who Should Attend?

Supporting your loans officers’ needs to constantly focus on and refresh themselves on key lending criteria can improve loan growth and loan portfolio quality, as well as enhance your Credit Union’s ability to meet members’ borrowing needs.