The lender has a legal responsibility to make sound loans. The source of your loan is depositor's money, and the law requires that depositors' money be repaid to them. If your loan package is through and complete, the lender will have the information required to make a decision.
LENDER REVIEW PROCESS:
When reviewing your loan package the lender will evaluate is based on criteria known as the "Five C's of Credit":
1. CHARACTER - reviews exactly what the name implies:
The lender makes a character judgment based on:
The lender finds this information in your:
3. COLLATERAL - provides a secondary source of repayment to minimize risk for the lending institution.
The amount and type of collateral your lender may require depends upon the type and purpose of your loan. The evaluation of collateral in your particular situation depends on many variables, including:
A lender does not view collateral as the primary source of repayment, but only as a means of reducing risk. Collateral protects the lender from loss. The lender hopes, however, never to have to take possession of collateral.
Different lenders accept different types of collateral. Common types of collateral include:
The lender gathers information about the collateral available, and assesses its quality by reviewing:
4. CASH FLOW - the cash you have to pay your debt. Cash flow helps the lender determine if you have the ability to repay the debt. The analysis of cash flow can be very technical. It may include more than simply comparing income and expenses.
Basically a lender determines cash flow by examining:
5. CONDITIONS - refers to external factors that affect the success of your business:
The lender obtains the above information from:
THE DECISION IS MADE
Having reviewed the 5 C's a lender makes the decision to approve or decline your loan request.
If your loan is approved, a lender will structure its terms to meet your needs. Each loan is customized to the customer's particular situation. A lender may customize:
WHAT LOAN DO I GET?
Based upon the purpose of your loan, your lender will offer an appropriate loan struture to you. The different types of loan structure you may receive include:
TYPES OF LOANS
LINE OF CREDIT - a dollar limit is set and an individual advances are available up to that limit. Each time an advance is made a separate loan note must be signed. "Loans up to" committments can be established at any dollar level. Advances are generally made to fill a gap in your business' cash flow, such as those cuased by the expansion of accounts receivable or inventory. This line of credit normally must be repaid down to a zero balance for a specified period of time annually. The interest rate generally floats based upon the prime rate.
FLEX LOAN - a line of creit usually accessible by telephone. It is generally used to ease temporary cash flow problems. A "Master Demand Note" is signed when the loan is established and you do not need to sign a note when each advance is made. The interst rate may be fixed or floating, based on the prime rate.
EQUIPMENT LOAN - also called a term loan because it has a specified period of repayment, ususally 2-5 years. It is used for the purchase of a specific asset. Payments are usually made monthly. The interest rate may be fixed or floating, based on the prime rate.
CONSTRUCTION FINANCING - an advance made to you during the construction or renovation of a building. Typically, your lender will require a letter of committment for a final mortgage before making a construction adnvace. The amount of the advance availalbe will be cauculated by your lender. Advances cannot be used as a down payment. The interest rate floats based upon the prime rate.
REAL ESTATE LOAN - a loan secured by a first mortgage on property. Your lender may require you to have equity of at least 30% of the property value. The term of these loans is generally 5 years or less, however payments may be based on a longer amortization. A lender will customize the term and amortization schedule for your loan. To keep your payment manageable, the term and amortization schedules may be different. Rates may be fixed or floating based upon the prime rate.
A FINAL WORD
All loan requests are not approved. If your request is declined, you are legally entitled to know the reason. Your lender should be willing to discuss the findings with you, so you can identify potential problem areas in your business. This discussion can be vaulable to you in the management of your business.
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