Commercial Loan Analysis Process
Commercial loan officers today are responsible for making educated decisions on whether to grant or decline commercial real estate loans. In determining whether to make or break a deal, these officers have to correctly perform an analysis on the company’s credit, capital, collateral, and capacity- otherwise referred to as the “four C’s of lending. The commercial loan analysis process involves loan officers’ evaluation of the company using numerous financial ratios, percentages, and trends while performing many interrelated analyses.
Commercial loan officers begin by using a general analysis of trends associated with the four C’s. If any of these factors does not aline with the industry norms, then commercial loan officers must perform a more detailed analysis of the company. General trend analysis gives loan officers a quick look into the company’s overall performance in a few key areas. These areas include, but are not limited to, sales, operating income, net income, working capital, and cash flow. Loan officers generally look at a five year trend in determining quickly whether a company’s performance has improved, declined, or remained the same over time.
In dissecting the four key factors involved in lending (capital, collateral, credit, capacity), it is important to define each. Credit analysis measures the companies ability to pay back their short and long term obligations. Collateral analysis examines the relationship between the value of all assets and pledged assets. Capital analysis looks at the leverage position of the company (long term debts, total debt, total assets, interest coverage). Capacity analysis measures whether or not the loan can be supported by the company. Comparing a company’s performance vis-a-vis the industry reveals much about the company’s strengths and weaknesses relative to the industry as a whole.
If the general analysis reveals that the company’s performance falls short in relation to the industry, a more detailed analysis is required for loan officers to identify which factors require consideration and how to go about addressing them. Contact the professionals at HML Investments today to speak with a specialist about applying for a commercial real estate loan.