While originating new loans may be a key area of focus for your community bank or credit union, renewing existing loans can absorb a significant amount of time. Many of the requirements are similar to new loans, and if you are not prepared, the renewal process can become frustrating and disjointed.
By having a streamlined process, you can collect what you need from your borrowers, get the necessary approvals, and get the loans closed for your business line of credit renewals.
Reviewing a Line of Credit for Renewal
Essentially, you want no surprises in the renewal process – either for yourself as the lender, or for the borrower. If the borrower’s financial situation has deteriorated, leading to questions around whether the line of credit will be renewed, the borrower should be prepared. Similarly, if the borrower requests an increase to the line of credit, this may change the underwriting requirements or require further review. Preparation for the renewal and communication with the borrower will ensure that the process goes smoothly.
Step 1: Start the Process Early
If you do not have a handle on the loans that are coming due for renewal, you may face delays and find that you are rapidly approaching the maturity date for the borrower’s loan.
Typically, you should begin the renewal process at least 90 days in advance. Review reports that identify what lines of credit are coming due in that time.
Step 2: Identify What is Needed
Each loan may have different requirements for renewal. Determine if you need updated financial statements or tax returns and make those requests to your borrowers as soon as possible. You may also need AR and AP aging reports or other documentation related to the business.
Step 3: Analyze the Business
Once you have collected updated financial information, you can begin the process of analysis. Through tax returns and financial statements, you can identify any changes from prior years. Review any loan covenant requirements and if those conditions have been met. You may also be pulling credit reports for the borrowers.
Step 4: Loan Approvals
Once the analysis is completed, you will need the necessary approvals. The package that you prepare for loan committee should include the following, as appropriate:
- Key financial ratios of the borrower
- A full picture of the borrower’s relationship, including total loan obligations and deposit accounts
- Stress testing or projections, especially if the borrower’s financial position has declined
- Discussion of the borrower’s background, management, strengths, and weaknesses, as well as any other pertinent information
Ideally, if you have a robust analysis from the original loan approval, you will not need to start from scratch on a renewal. You can take the original approval and update it to reflect current information for the borrower.
Step 5: Closing the Loan
After loan approval, the loan documents can be prepared and the signatures for the borrowers obtained.
Streamlining the Business Line of Credit Renewal Process
Keeping the loan moving through the renewal process is a challenge faced by many financial institutions. The borrower may not respond to requests in a timely manner, or the loan gets held up in underwriting or loan approval.
By having the various stages of loan approval identified and the staff responsible for each stage, you can improve the overall process. Identify the flow of communication from one stage to another, and ensure that there are no bottlenecks in the process.
For More Information:
A commercial portfolio lending solution will give you a clear path for a consistent review process and streamlines the processes. To see how the Square 1 Credit Suite can meet this need, contact us or schedule a demo today.
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