毕博上海银行咨询Final Deliverables SmBusLoanProcess.doc

hanvit bank small business commercial loan approval process (draft) 11/10/99 prepared by kpmg, llp hanvit bank small business loan approval process _ kpmg draft 2 table of contents credit review and loan approval for small business loans .3 table 1 - applicability of retail scorecard in business loan decision by total loan amounts.3 table 2 - credit review process.4 table 3 - applicability of retail scorecard in business loan decision by borrowing entity4 loan decision process5 steps in credit review for small business loans6 limits, pricing, rating9 note concerning loan applications not processed in crms.10 appendix a- use of retail scorecard vs financial analysis in commercial lending.12 appendix b- what the bank should review.14 hanvit bank small business loan approval process _ kpmg draft 3 credit review and loan approval for small business loans for purposes of this document, small business loans will be defined as those whose total amount is within the branch managers or relationship managers lending limit as defined in the hanvit bank credit and lending policy manuals. these loans may range from a few thousand won to as much as 1.5 billion won (approx. usd1.25 million) for a class a commercial branch manager. because of this wide range of loan size, and the corresponding financial size of the businesses, it is difficult to outline a single set of process steps for all such loans. for smaller loans, a simplified procedure will be outlined. for larger loans which begin to approach the w1.5 billion limit, the full crms credit analysis should be completed. it is not valid to make an excuse that the borrower does not have accurate financial information which could be used to justify larger loans. while a very small loan could be made based on personal financial information of the business owner, larger loans require financial analysis and the borrower should be required to fill out hanvit bank financial statement forms, if no formal financial information is available. 1 table 1 - applicability of retail scorecard in business loan decision by total loan amounts: applicability of retail scorecard total loansborrowerguarantor less than 50 mm won adequate if loan is to individual proprietor - not applicable for loans to partnerships or corporations can be used to assess personal guarantee w 50mm to w 150mm adequate for loans to individuals, but separate business financial data should be available not applicable for loans to partnerships or corporations can be used to assess personal guarantee w 150mm to w 250mm can provide information on individuals, but separate business financial data should be available not applicable for loans to partnerships or corporations can be used to assess personal guarantee over w 250mm not applicable. business financial statements from the borrowing entity should be obtained. can be used to assess personal guarantee 1 note: the financial statements should contain a statement to the fact that the financial information is being provided to the bank for the purpose of obtaining credit, that the information is true and correct to the best knowledge of the persons whose financial information is represented on the forms and must require signatures of all persons whose financial information is represented attesting to the truth of the information. hanvit bank small business loan approval process _ kpmg draft 4 table 2 - credit review process new loan application total loansfinancial statementsrun scorecard risk ratingcredit memo less than 50 mm won not requiredyeslowest pass grade none w 50mm to w 150mm recommended. review based on results of scorecard yeslowest pass grade summary w 150mm to w 250mm2 required. informal financial statement review or spreadsheet analysis yeslowest pass grade summary w 250mm w 500mm required. 3 informal financial statement review or use of crms modules yes, for guarantee lowest pass grade detailed w 500mm w 1.0 bn required. use crms modulesyes, for guarantee brr from crms modules crms report w 1.0 bn w 1.5 bn required. use crms modulesyes, for guarantee brr, frr from crms modules crms report table 3 - applicability of retail scorecard in business loan decision by borrowing entity:4 business borrowing entity use of scorecarduse of business financial statements basis for loan decision individual (one person entity) can be primary source of loan decision for small loans (see above). use if available.net income of the individual (from personal financial statements). sole proprietorship (small business with employees) can be primary source of loan decision (see above). strongly recommended.net income of the business, (from personal or business financial statements). partnershipto value strength of guarantors.5 required.financial strength of the partnership business. sme account (un- audited) to value strength of guarantors. required.financial strength of the business entity. sme account (audited) to value strength of guarantors. required.financial strength of the business entity. large corporate account not appropriaterequired.financial strength of the business entity. 2 small business credit scoring in the u.s. has shown that for loans above usd100,000 (approx. w 120 million) the accuracy of scorecards prediction of business owner behavior diminishes and more reliance is required on financial statements and business plans. “impact on small business scoring”, meridien research, april 1998. 3 the u.s. federal reserve board cautions against the use of credit scoring techniques for loans or credits that are large or complex. 4 see appendix a for additional information. 5 see discussion related to importance of obtaining personal guarantees. hanvit bank small business loan approval process _ kpmg draft 5 loan decision process: to facilitate simplification of the loan application analysis process, certain policy-based conditions should be set which will be the first gate through which the loan request will proceed. if the borrower fails to meet these conditions, the loan request should be rejected with no further review. for example, if a certain condition exists, such as a red condition the bank policy will dictate that the loan request will be rejected. the next steps will depend on the size of the loan and size of the borrower. the decision to make the loan is to be based principally on the cash flow of the business. the main question is whether the net cash flow of the business entity or the net income of the individual (after all business and/or household expenses) is sufficient to repay the loan. cash flow analysis will require financial statements. thus for all but the smallest loans (see table above), financial statements should be obtained. these statements could be prepared by the borrowers accountant. if the borrower does not have an accountant, the bank should demand income tax returns from the borrower and the principal owners as will be described below. alternatively, it has been recommended that hanvit bank develop financial statement forms (balance sheet, income statement, cash flow statements) which can be given to the borrower to be filled out. note: if the borrower will not provide financial information sufficient to show that the borrower personally or the business entity has the ability to repay the loan, the loan should not be made. the review of the financial statements should look mostly at the cash flow as it relates to the loan request. assets of the business which can be pledged, or guarantees of the principal owners of the corporation are only safeguards in the event of business failure. they should not be the primary criteria for approving the loan since without adequate cash flow, the loan would go into default immediately. cash flow capability should be determined as follows: determine the monthly cash flow of the business entity from the financial statements or tax returns as appropriate. determine the monthly loan payment required to repay the loan over the requested term. if the amount of the monthly cash flow in excess of the monthly loan repayment is not substantial, the loan should probably not be made under those terms. a smaller loan, or extended repayment term may be required for the borrower to qualify for the loan. hanvit bank small business loan approval process _ kpmg draft 6 steps in credit review for small business loans: the following sections set out some steps for loan decision making and processing. the goal is to provide an efficient, cost effective decision process while maintaining the highest possible accuracy of the decision to avoid loan losses. answers to these questions will guide the relationship manager (rm) to ask for the proper information to allow the rm to make an informed decision on the loan request. the rm should utilize the hanvit bank loan application forms for all information related to the loan. the borrowers business: what is the name of the business? is the business, an individual business person (proprietorship)? is it a separate legal entity?y/n what kind of legal entity?partnership? corporation? proprietorship: if the borrower is operating the business as a sole proprietorship, the borrower will own any business assets as well as the borrowers personal assets in the his/her own name. if this is the case, the bank should get financial statements from the borrower listing all business and personal assets. the bank should also get the last three (3) years income tax returns which should show the business income and any other personal income (such as from a spouse). if the borrower and the spouse file separate income tax returns, the bank should get the last 3 income tax returns from each person. this is required to get as accurate a look as possible into the amount of income the borrower actually has. this income should be compared against the business and household expenses of the borrower and spouse to determine the amount of money the borrower has remaining to be used for loan payments. partnership or corporation: if the business is a partnership or corporation, it will have separate financial statements from the personal financial statements of the principals of the business who are requesting financing. in this case, at least three years financial statements should be obtained for the business. an analysis of the business financial statements will determine the size and financial strength of the business. for underlimit loans it is likely that the business is small and that there will be a need to have the loans to the business guaranteed by the principal owners of the business (partners or shareholders). if this is the case, it is required that the bank get the personal income tax returns of all such owners as well as their own personal balance sheet (a listing of assets and liabilities). to whom is the loan being made? loans should generally be made to the entity which owns the business assets. for small business loans, it is advisable to have all assets of the business pledged to the bank as collateral for the loans. if the borrower requests that the loan is to be made to the borrower personally for investment in the business, or to another entity special caution is required. in all cases, the hanvit bank small business loan approval process _ kpmg draft 7 financial statements of any party to the loan transaction, the borrower, guarantor, entity pledging collateral, etc. must be obtained and reviewed. what is the loan request? how much money is being requested for the loan? for how long will the money be needed? for what purpose will the money be used?6 how will the loan be repaid? from personal earnings of the business person? from net profits from the business? over what time period (months or years) will the loan be repaid? what payments will be made? principal and interest?how much per payment? interest only? caution: it should be specifically documented why principal is not also being paid on a regular basis. interest only loans can easily lead to complacency on the part of the borrower and lack of financial discipline. this can lead to large losses when the principal amount is later required to be repaid and the borrower has not set aside enough money to repay the principal. collateral and guarantees what collateral is being pledged to secure the loan? who will guarantee7 the loan? personal guarantees should be obtained from the owners of the business, partners, or major shareholders of corporations. in all cases where guarantees are taken, the guarantee must be given by the principals and their spouses. financial information required generally the bank should obtain the following information: personal credit information about the guarantorstypically principals and their spouses select financial data from borrowers (or guarantors) personal financial statements (e.g., net worth, total assets). information about any major personal assets offered as collateral such as real estate or other principal assets should be verified by a check of public records of ownership. company income sheet and tax information (three to five years) company balance sheets (three to five years) company cash flow statements (three to five years) additional information related to the loan request 6 note: if the loan is to purchase business assets, all assets should be taken as collateral 7 u.s. studies have shown that 40% of businesses fail within the first 2 years of operations and 80% within 10 years. these studies also show that the stronger the personal guarantee, the less likely the business is to fail. hanvit bank small business loan approval process _ kpmg draft 8 specifically for small business loans the following financial information should be obtained: for individual borrower get: last 3 years business financial statements and/or last 3 years business and/or personal income tax returns, and personal balance sheet (assets & liabilities). for partnership or corporate borrower get: if formal financial statements, get: last 3 years financial statements last 3 years income tax returns for principals and their spouses who will guarantee the loan, personal balance sheet (assets & liabilities) of the principals and their spouses who will guarantee the loan. if no formal financial statements are available, get get last 3 years business income tax returns business balance sheet and income statement on hanvit bank forms last 3 years income tax returns for principals and their spouses who will guarantee the loan, personal balance sheet (assets & liabilities) of the principals and their spouses who will guarantee the loan. last 3 years business and/or personal income tax returns, and processing steps should follow the hanvit bank process with two differences. first, the scorecard should be used to get a report of the credit worthiness of the individual. the financial statement analysis should be done in the most efficient manner possible relative to the size of the loan. second, it is difficult to accurately blend a score or rating of the individual and the business. the score or rating of the individual who is the principal of the business may give an indication of how the affairs of the business will be conducted. however it is the financial strength of the business operations which will provide the ability of the borrower to repay the loan. for small loans, if a visual review of the financial statements (business and personal) shows solid net worth, good income, the rm can proceed to execute the loan. if the loan is for a large amount, the rm should make a more detailed review of the financial statements including, if possible, the use of the crms modules to analyze the financial statements. step 1: application data. information is captured on credit applications. information about the small business and the company principals or owners (and their spouses) is obtained. information about any additional co-signatories or guarantors is also obtained along with the personal financial statements of these persons. at this point, information about the company principal and spouse may be entered into the retail scorecard system. step 2: prescreening. before proceeding to the next step, the bank should screen applications against bank guidelines. typically, prescreening either rejects applications or sends them for review based on certain factors such as red conditions, debt-to-income ratio, and other criteria revealed on the application. hanvit bank small business loan approval process _ kpmg draft 9 step 3: public credit information. information from both consumer and business credit bureaus should be obtained. information from the banks customer information files (cifs) about both the small business and the guarantors may also be accessed. step 4: credit scoring. processing a small business application with two guarantors (e.g. co-owners of the business and their spouses) will produce two credit scores from the retail scorecard. the individual scores in this example will probably represent different levels of risk. while each guarantor will be required to fully guarantee the requested loan, the bank should decide whether to use the highest score or an average or blend of all available scores. step 5: repayment ability. there are generally two entities whose financial condition m