Commercial Loan Application Process

UFCU uses a number of different criteria in evaluating a potential borrower for a Commercial Loan. The starting point for any business loan decision lies in evaluating the Five C’s of Credit:  Character, Cash Flow, Collateral, Capital and Conditions. A discussion of each of these follows:

Character : 
When evaluating a borrower’s Character, we focus on a number of areas, beginning with credit history.  For an individual borrower or Sole Proprietor, a personal credit report is pulled.  The information contained in this report details an applicant’s payment history, number of delinquencies, number of accounts, and account balances.  This gives us an idea of the borrower’s past credit history and is a good initial indicator of how they will handle a commercial loan in the future.   For corporate borrowers, we have access to Dun and Bradstreet Reports (D&B’s) which gives comparable information to that contained within an individual credit report, but on a corporate level, with information from vendors in the report.  Character is also used to refer to a number of different attributes, and includes an applicant’s experience in the industry, an analysis of his management team, historical relationship with the Credit Union, and forthrightness displayed in the application process.

Cash Flow: 
When evaluating a potential borrower’s Cash Flow, we examine past and projected ability to repay a loan.  We ask for three years of individual and business (if applicable) Federal Income Tax returns to analyze historical cash flow.  A detailed analysis is completed, showing the applicant’s sources of income, offset by their debt, both business and personal.  This allows us to see if, based on past results, this applicant has the capacity to repay a proposed loan.  This is a very useful tool and the information contained in this analysis is sometimes surprising to an applicant.  In analyzing an applicant’s complete cash flow, it allows us to determine if, in looking at all the applicant’s debt, they generate enough income to repay an additional loan.  An analysis of Projections provided by the borrower is another tool we use to assess future ability to repay a loan. We encourage all applicants to go through the process of completing a Business Plan and submit it with their application. A well-written Business Plan is an invaluable for both the applicant and the Lender.  The Business Plan addresses areas such as target market; projected cash flow; barriers to entry; competition; marketing strategy and more.  Your local Small Business Administration (SBA) Office is a great place to start developing a Business Plan and it has many resources available for people looking to start or expand a business.

Collateral: 
All commercial loans must be secured with collateral. Collateral is the security we hold for the loan in case of default.  For example, if a commercial loan is made for the purchase of a tractor, we will require that the tractor be assigned to us. If a loan is made for the purchase of manufacturing equipment, we will hold a security interest in the equipment we financed as collateral.  Collateral affords the credit union with an additional level of protection should the loan not be repaid.  Separate, but tied to, Collateral is the issue of personal guarantees.  The Credit Union requires that all commercial loans not only be secured with collateral, but also is protected by the personal guarantee of the owner(s).

Capital: 
Capital refers to how the business is or will be financed.  The credit union does not extend 100% financing for the purchase of any assets, therefore a portion (typically 20 – 30%) of a borrower’s individual resources must be used to fund a portion of the purchase price.  We view lending as a partnership, with both the Credit Union and the applicant investing in the business.  We look to see, also, that the applicant has adequate resources to not only invest in the business, but to also meet their other debt obligations and personal living expenses.  We do not want to see an applicant extend themselves so much that they lose sight of other creditors who must be paid.  This can also be viewed as a modified debt to income analysis.

Conditions: 
Conditions typically refer to outside factors which can affect an applicant’s ability to repay a loan.  The Credit Union will analyze information on topics such as:  Who are your competitors?  What regulations does this industry face?  What is the targeted customer base?   What is the general economic environment in which the company operates?  The answers to these questions, and more, help in determining which direction the industry is going and what roadblocks to success there may be.  

In closing, we welcome your Commercial Loan Application.  We hope this article was helpful in summarizing what we look for in Commercial Loan Applications and the criteria we use in making a loan decision.  The credit approval process is never black and white, with the above demonstrating all of the many variables which are analyzed in making a commercial loan decision.  The more information an applicant provides up front, starting with a Business Plan, the more streamlined the process will be.

Prepared By:   Maria Milazzo
March, 2008