Collateral. The liquidation of collateral – typically accounts receivable, inventory, and property, plant, and equipment – is https://1stamericanloan.com/payday-loans-ga/ the primary source of principal repayment if the borrower defaults. Therefore, the institution should develop policies that encourage the proper monitoring and valuation of collateral and should also establish acceptable loan-to-value ratios based on the type of collateral. As many CI lenders have learned, there can be a high risk of fraud with these types of collateral. For example, inventory and equipment can be easily moved and accounts receivable can become uncollectible. CI lenders should understand the nuances of accepting this type of collateral and have the experience to appropriately evaluate its worth and secure the banks priority lien position in the event of default.
It is an art, since the pricing is expected to reflect the lenders judgment about a myriad of risk factors unique to the borrowers business and the purpose and terms of the credit
Covenants. Loan covenants can provide an early warning system for emerging problems. A complete discussion of covenants is beyond the scope of this article, but some highlights are worthy of consideration.
While loan covenants should be aligned with the borrowers financial condition and projections, the loan policies should require certain covenants for all CI loans and provide optional covenants to be applied at the lenders discretion, with a mechanism for prior review of exceptions when warranted. Further, because of the protective nature of covenants, community bank CI lenders are strongly discouraged from making “covenant-lite” loans, as those loans increase the banks longer-term risk despite the current creditworthiness of the borrower. Read more