Business Loan Policy At a minimum, loan policy must address the following: TYPES Types of business loans TRADE AREA Your Trade Area Max Amount Max $ of Assets, in relation to Net Worth, that invest in Business Total Business Loan Loans, Given category or Type of Business Loan, to any One MemberType of Business Loan or group of associated members. One Member/Group Qualifications/experience of personnel (minimum of 2 years) involved LO EXPERIENCE in making and administering business loans; A requirement to analyze and document the ability of the borrower to REPAY Repay the loan; Receipt and periodic Updating of financial statements and other UPDATING FS documentation, including tax returns; Cont.….
Business Loan Policy A requirement for sufficient documentation supporting each request toDOCUMENTATION extend credit, or increase an existing loan or line of credit (except where the board of directors finds that the documentation requirements are not generally available for a particular type of business loan and states the reasons for those findings in the credit union’s written policies). At a minimum, your documentation must include the following: (1) Balance sheet; (2) Cash flow analysis; (3) Income statement; (4) Tax data; (5) Analysis of leveraging; and (6) Comparison with industry average or similar analysis; COLLATERAL The collateral requirements must include: (1) Loan-to-value ratios; (2) Determination of value; (3) Determination of ownership; (4) Steps to secure various types of collateral; and (5) How often the credit union will reevaluate the value and marketability of collateral;INT RATE/MATURITY The interest rates and maturities of business loans; General loan procedures which include:LOAN PROCEDURES (1) Loan monitoring; (2) Servicing and follow-up; and (3) Collection Identification of those individuals prohibited from receiving member PROHIBITED business loans
Other NCUA 723’s How Much May One Member, or a Group of Associated Members, Borrow? 15% of NET WORTH Amount of out-standing member business loans (including Or any unfunded commitments) to any one member or group of associated members must not exceed the greater of: $100,000 (a) 15% of the credit union’s net worth; or (b) $100,000. What is the Aggregate Member Business Loan Limit for a Credit Union?The aggregate limit on a credit union’s outstanding memberbusiness loans (including any unfunded commitments) is the 1.75 Times of NET WORTHlesser of 1.75 times the credit union’s net worth or 12.25% of Orthe credit union’s total assets. 12.25% of ASSETS
Business Structure• Sole Proprietorship (1040 Schedule C)• Limited Liability Company (1120)• Corporation (1120)• Partnership (1065)• S-Corporation (1120S)
• Business Acquisition Loans • Revolving Check Credit• Debt Financing • SBA Commercial Loans• Franchise Start-Up Loans • Secured Working Capital Loan• Line of Credit • Short Term Loan• Long-Term Loans • Start-Up Loans• Micro-Loans • Unsecured Working Capital Loan• Professional Loan (CPA, Dentist etc.)
General Loan RequirementLoan Request/Application Notes Payable Schedule.History of Business Profit and Loss Projection • To be completed by all applicants including location analysis, Management Resume. competitive analysis and future of the business. Personal Financial Statement • each proprietor, orLegal Business Documents • each limited partner who owns 20% or • Certificate of Incorporation/ more interest and each general partner, Partnership Agreement or • Articles of Incorporation/ Certificate • each stockholder owning 20% or more of Partnership voting stock and each corporate officer • Corporate By-Laws and director, or • County Assumed Name Certificate • any person or entity providing a • State Assumed Name Certificate ( if guaranty of the loan. Corporation) • Tax Identification No (TIN) Certificate Personal Cash Flow Statement IRS Form 4506-T.
Additional Loan Requirement Business Plan Cash/Equity Injection.(start-up business or business expansion). Include a Include the last 3 months of bankdescription of management, feasibility analysis, statements showing the source of cashassumptions, site evaluation, and demographics for /equity injection.each location. Interim Profit & Loss and Balance Sheet Proposed Purchase Agreement orCurrent within 45 days of application for business Executed Purchase Agreementbeing: Must include cost allocation of all assets being(1) acquired, purchased(2) existing/expanded, and(3) all affiliates of applicant (20% or more ownership Notes or Loan Agreementsinterest by any of the owners/partners/shareholders (Refinanced Loan Only)of proposed borrower). Personal Tax Returns. Business Financial Statements and Tax For the past three years on each individual Returns. (Last 3 years) Existing or Proposed Lease Agreement
Collateral and Security Requirement LTV Type of Collateral Commercial Real Estate LoanMaximum 80% • 1st security lien on property, land & building Example: All Liens Rental shopping strip, Convenience store, Storages, Churches, Farm Land, Other commercial properties. 95% Business Loan Against EquipmentMaximum • 1st priority lien UCC on equipment, machinery, inventory etc. If covered through Private Mortgage Example: or Equivalent Farm Equipment, C-Store Equipment, Any kind of Insurance business inventory, commercial equipment etc.
Analyzing Loan Application Can my Will my What do I do if my borrower pay? borrower pay? borrower doesn’t pay? Character & Cash Flow Collateral Circumstances Sources of Repayment Financial Analyses• The Borrower’s Profits or Cash Flows • Common Size Ratios of Members Over Time• Business Assets Pledged as Collateral • Financial Ratio Analysis of• Strong Balance Sheet With Ample Member’s Financial Statements Marketable Assets and Net • Current and Pro Forma Sources Worth and Uses of Funds Statement• Guarantees Given By Businesses
Credit UnderwritingOne of the most important factors used to determine the fund-ability for a commercial loan request is the Debt Service Coverage Ratio, commonly referred to as the Debt Coverage Ratio (DCR) or Debt Service Coverage Ratio (DSCR). The DSCR is a ratio used to determine the amount of debt that can be supported by the revenues generated from the commercial property. Very simply it’s the net income generated by the commercial business divided by the new commercial loan payment. DSCR is calculated both on Business and Individual borrows financial data. Global debt service Coverage Ratio gives an overall aspect of the business. Recommended DSCR of 1.25
Credit Underwriting XYZ Corporation Mr. & Mrs. Smith DSCR DSCR Average Income of 2011 & 2010 Average Income of 2011 & 2010Income 137,000 Salary/Wages 90,000+ Depreciation Expense 26,000 Est. 45% Tax & Living Expense 40,500+ Interest Expense 15,000 Net Cash Available for D/S 130,500+ Amortization Expense 6,000 EBITDA 178,000 Total Debt Per Credit Report 54,000Debt Service - Current Obligation 25,000 DSCR 2.42Debt Service - Proposed Loan 101,263 Total Business Debt Service 126,263 Global Cash Flow DSCR 1.41 Net Cash - Business 178,000 Net Cash - Personal 130,500Note: Proposed Loan of 1 Million $ amortize over 15 Total Net Cash Available for D/S 308,500year with an interest rate of 6% D/S - Business 126,263 D/S - Personal 54,000 Total Debt Service 180,263 Global Surplus/(Deficit) 128,237 Global DSCR 1.71
Loan Risk Matrix
Loan Risk Matrix
Loan Risk MatrixFinancialThis section consists of 5 considerations based on the type of information provided and,the actual financial results. Only one option under each consideration is to be chosen(for ease of reference each component is color coded).
Factors Change Loan Decision Appraisal Environmental Appraisal requirements under Phase I Phase II NCUA § 722.3. Phase I cover initial site Phase II cover detail Normally at Commercial Real inspection and basic site inspection where Estate transactions required sampling for Phase I showAppraisal from a State Certified or environmental related environment related Licensed Appraiser contamination hazard found in the first report Commercial Real Estate transactions required Environmental Report • Convenience Store Business • Dry Cleaning Business • Any other environmental related businesses
Closing ChecklistPromissory Note Title Insurance Commitment & EndorsementsDeed of Trust EnvironmentalCorp. Guaranty Report/AssessmentIndividual Guaranty Contract documents toUCC-1’s LenderSecurity Agreement AppraisalAssignment of Rents/Leases SurveyInsurance f/b/o Lender Environmental Report
Audit Review EXECUTED & • 1. Are the following items properly executed and recorded: RECORDED a. Note? b. Security Agreement? c. Contracts? d. Liens? PRINCIPLES OF • Are the principals in the business identified? BUSINESS FINANCIAL • Are complete financial statements in file with supporting STATEMENTS schedules and tax returns? COLLATERAL • Are collateral conditions and value determined by independent qualified appraisers?PERIODIC REVIEW • Is periodic review of the financial condition documented?
Audit ReviewSITE INSPECTION • Do loan officers make regular on-site inspections of business sites and collateral? 25% EQUITY • For construction and development loans, does the borrowerCONSTRUCTION have a minimum of 25% equity interest in the project being financed? 723.3(b) If Yes: NCUA Approval 9. If no, has the credit union obtained NCUA approval?PRE-APPROVAL • For construction and development loans, does the credit DRAW union release funds according to a pre-approved draw schedule and only after on-site written inspections by qualified personnel? 723.3c
Periodic Review (g) A requirement to analyze andFinancial Statement document the ability of the borrower to repay the loan consistent with appropriate underwriting and due Credit Reports diligence standards, which also addresses the need for periodic financial statements, credit reports,Business Site Visit and other data when necessary to analyze future loans and lines of credit, such as, borrower’s history andEnvironmental Impact experience, balance sheet, cash flow Assessment analysis, income statements, tax data, environmental impact assessment, and comparison with industry averages, Tax Data depending upon the loan purpose;