CI lending requires a continually open, honest, and transparent business relationship between the lender and the borrower

CI lending requires a continually open, honest, and transparent business relationship between the lender and the borrower

Lending Staff

CI lending often requires a different skill set than that required for real estate-based lending. This doesnt mean that real estate-based lenders cannot become effective CI lenders with appropriate training and oversight, but it does mean that management should not merely ask real estate lending and credit administration staff to start making and monitoring CI loans and expect them to be effective immediately. It may also be increasingly difficult to hire experienced CI lenders and credit administration staff, as many community banks are seeking to expand into this market.

Community banks seeking to expand their CI lending may be best served by a combination of targeted training and selective hiring. Experienced commercial lenders and credit administration staff can be trained on sound CI lending practices and can learn on the job under the mentoring of experienced CI lenders and staff. Regardless of the approach chosen, management should recognize that even selective hiring and targeted training can be expensive and that personnel costs should be factored into the cost of any new or expanded CI program.

A bank looking to expand its CI lending portfolio should ensure that it is appropriately staffed at all levels to manage the risks inherent in this type of lending. This starts at the top of the organization, as chief credit officers should have proficiency in the risks of CI lending in order to provide appropriate oversight to loan officers. Loan officers should understand the inherent risks and nuances of CI lending in general. Moreover, institutions lending in niche areas – such as entertainment lending in Los Angeles or oil and gas lending along the Gulf Coast or in the emerging regional shale geographies – should also ensure that their lenders have expertise in the targeted niche. Moreover, small business lending should be considered a niche, with lenders needing deep knowledge about the risk patterns of small businesses and the requirements of guarantors, such as the Small Business Administration.

Depending on the structure of the loan, the lender may have monthly, weekly, or even daily discussions with the borrower about draws, repayment plans, and business issues. While maintaining this close relationship, the lender should be careful not to become an advocate for the borrowers interests over those of the bank.

A full discussion of the appropriate skill set for a seasoned commercial lender is beyond the scope of this article. 4 However, at a high level, management should ensure that the commercial lenders have the skills to understand and critically analyze core elements of CI loans, including:

  • The operations and business cycles of the customer base
  • Financial statements and financial metrics
  • Cash flow analysis and projections, including sources and uses of cash and cash needs to replace depreciable assets
  • Global cash flow for a closely held business or groups of related businesses/partnerships
  • Liquidity sources for repayment
  • Collateral valuation
  • Loan structure and covenants that will protect the bank without unnecessarily constraining the borrower
  • Appropriate advance rates on eligible receivables and inventory

Policies and Procedures

As noted above, various sources, including the Federal Reserves Commercial Bank Examination Manual, 5 provide general guidance on community bank lending policies. In addition to establishing growth and concentration parameters to mitigate risk, banks boards of directors should set policies, such as those discussed below, that promote a successful CI lending program. Exceptions to these policies should be reported to the board, and trends in exceptions should be analyzed to determine whether the volume and nature of exceptions are SD installment loans contributing to higher-than-desired CI credit risk.

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