Successful financing forms the crux of business growth and sustainability. Critical to acquiring much-needed capital by businesses, the process of commercial lending is greatly important and plays a vital role in any organization. This article explores the complex commercial lending process, including the current trends, recognizing opportunities in different markets, and support insights.
Understanding the Commercial Lending Process
In commercial lending process, the commercial lending requires several orderly steps that would help them in understanding the condition of a business that encompasses several key components. Below process makes the organization to achieve goal efficiently and effectively.
Application for loan
For a commercial lending process, a business needs to submit a loan application. Such an application paper contains the amount of loan in desire, the purpose of the loan, and most importantly the details about the business are encoded in it, which may include financial health and operational objectives.
Collection of Documents
There are so many documents that lenders will demand to assess the sound financial position of the business, among them hence collection of documents is essential in lending process.
Financial Statements
In the process of assessing Profitability and cash flows, lenders engage in financial statement navigation involving balance sheets and income statements.
Tax Returns
Personal and business tax returns are very important measures of income and financial soundness in evaluating how lenders navigate.
Business Plan
The company should have aims, strategies, and how the loan will assist in creating growth as well as making a detailed business plan.
Credit Rating
In this process the lenders have to check his credit history and score for assessing his credit worthiness.
Credit History
The pattern of the history of past borrowing behavior would clearly outline how repayment dependable a consumer is.
Credit Score
Good credit score contributes significantly to the approval of loans and terms.
Assessment of risk
Assessment of risk includes analyzing of risks that could affect the business. Below are the various components that may affect the efficiency of a business through analyzing industry trends and economic conditions.
Industry Trends
Focusing on the market landscape will enable lenders to anticipate trends, challenges, and opportunities available.
Economic Conditions
The interest and inflation rates are the macroeconomic indicators that play a crucial role in a lending decision.
Underwriting
The underwriting stage involves checking all gathered information to establish if the loan will be viable. At this stage, financial risks are evaluated, and the terms of the loan are established, including the interest rate and repayment schedule.
Decision Making
The lender bases the final determination on the assessment of an underwriting decision. Approval means that the lender communicates all terms and may include covenants and conditions to make accurate decision which may benefit the organization.
Loan Closing
In loan closing both parties close the deal and sign the loan documents by the business
in committing itself to the terms of the loan.
Disbursement of Funds
At the time of loan’s closure, the money is disbursed and this thereafter enables the business to apply the much-needed capital.
Monitoring and Repayment
Lenders will track the business during the period of the loan to ensure that it operates within the loan agreement. The business, on its part, will repay the loans accordingly.
Trends in Commercial Lending
Commercial lending trends are moving towards more digital solutions, flexible loan options, and a growing emphasis on sustainability and ESG goals.
Trends in Commercial Lending
Digital Transformation
This efficiency, however, has enabled firms to streamline lending as through the development of a digital application and processing platforms with high efficiency. As reports by McKinsey published last year 2022 attest, nearly 70 percent of lenders are putting significant investments in technology.
Emphasis on what is important: small and medium enterprises.
Small and medium enterprises play a vital role in the economy of the world. An example of this is where it has been stated that the Small Business Administration of the United state has specified that in 2022, small businesses account for 44% of U.S. economic activity. Now lenders are becoming aggressive to formulate products that should cater to the needs of SMEs to ensure growth and innovation.
Alternative Lending Growth
Alternative lending platforms include online lenders and peer-to-peer lending. The World Bank is of the opinion that this market will reach $1 trillion by 2025, driven by the increasing demand for quicker access to capital and flexible terms.
Emphasis on Sustainability
This has made most lenders include sustainability criteria in their lending decisions, which is a sign that the world is slowly drifting towards more responsible lending practices. The Global Sustainable Investment Alliance reports that assets under sustainable
investments grew by 42% between 2018 and 2020.
Regulatory Changes
Countries are revising the regulatory framework to enhance the practice of fair lending and increase competition. Hence, for example, the most recent changes in regulations that have been implemented in Australia aimed at enhancing access to credit for SMEs as well as removing obstacles from the way of new lenders.
Commercial Lending Opportunities
As seen, there is various opportunities in commercial lending like industry specific financial products, partnership with fintech companies, Untapped market, financial education programs. Let’s know the points in brief:
Commercial Lending Opportunities
Industry-specific financial products
The industry-specific financial products can be developed for any one of the specific industries or business activities. Thus, loans to support the creation of technology startups or green finance might be available to develop industries in such sectors which may help to focus on industry specific products.
Partnerships with Fintech companies
Partnership will help in getting new technology, smooth working, and treating customers well. Partnership makes the processes agile and reaches out to more markets in a wider sense.
Untapped Markets
Some companies work in rural or underbanked markets where mainstream access to banking services is little. Lenders that achieve these markets can capture an untapped market while facilitating local economic growth and efficiency.
Financial Education Programs
Lenders can support businesspeople in financial management and lending. They can help potential borrowers make smart decisions through the availability of all resources and training workshops that ensure the knowledge of the borrower.
Services offered by Magistral Consulting for Commercial Lending
The operational processes of lenders need to be agile and cannot afford to go wrong in due diligence and compliance. Our services for lenders not only improve the speed of execution but the confidence with which the lending decisions are taken. Here is what we do.
Financial Projections
Estimation of future financial performance given certain assumptions.
Financial Models
Design detailed models of financial scenarios to direct decisions.
Cash Flow Models
Cash inflow and cash outflow analysis
Covenant Monitoring
Monitoring the compliance of loan agreement with financial covenants.
Credit Risk Reviews
To evaluate the creditworthiness of a borrower by analyzing the risk associated with lending money to him.
Pre-Qualification Credit Assessment
Evaluation of the financial value of a borrower prior to one’s application.
Target Screening
Target detection and evaluation of potential investment or acquisition targets.
Underwriting
Risk and terms of finance to be issued, considered for approval
Capital Structure Analysis
Determination of the company’s ratio of debt and equity financing
Credit Monitoring
Periodic review of the creditworthiness of clients or borrowers
Lending Operations Outsourcing
The provision of lending operations through external third-party suppliers.
About Magistral Consulting
Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research
For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact
About the Author
The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to prabhash.choudhary@magistralconsulting.com
What is underwriting?
It is used by a lender to present all collected information to come up with loan terms, interest rates, and repayment schedules based on financial risk evaluation.
What is the interest of the lender in the small and medium enterprise?
For the fact that SMEs contributes growth and innovation to lenders, since it now plays a crucial role in the global economy.
What are the rewards the financiers get from collaborating with the fintech companies?
In addition to that, collaboration with fintech has a real impact on the quality of customer service provided and enables easy access to the latest technological innovation, making business activities much more agile and responsive.
How do interest rates influence the commercial lending practice and decision?
Interest rate mainly determines the cost of offering loans as well as the costs involved in repaying loans to firms that rely heavily on economic environments.