With an improving economic environment, many banks are seeing strong loan growth. In fact, a recent report from the OCC highlighted the fact that loan growth doubled over the past year in the Northeastern district. However, it is important for institutions to remain disciplined during this growth, all the way down to the global cash flow analysis of a loan.
Credit analysis is more challenging with complex borrowers – those with multiple people, businesses, real estate properties, etc. – and a global cash flow analysis is required to properly assess the creditworthiness of the whole entity.
Unfortunately, applying a global cash flow analysis isn’t always easy. According to a Sageworks poll conducted in 2013, bankers struggle most with combining personal and business incomes in the analysis. Other challenges include double counting, manual errors, acquiring complete financials and deciding percentage ownership in each entity between respect guarantors.
To help avoid mistakes and streamline the global cash flow process, bankers can follow these three key suggestions:
1. Request and analyze all necessary tax forms
Tax returns and their supporting schedules are vital to performing a global cash flow analysis. K-1 tax forms, for example, are critical to obtain the distributions and contributions applicable to the individual.
The OCC’s Internal Guidance from April 2008 explains that an analysis of the guarantor’s global cash flow “should consider inflows, as well as both required and discretionary cash outflows from all activities. This may involve integrating multiple partnership and corporate tax returns, business financial statements, K-1 forms and individual tax filings.” Lacking this level of comprehensiveness can diminish confidence in the accuracy of the assessment of guarantor strength.
2. Create consistency among those involved in analysis
When banks have multiple people performing global cash flow analysis, there are plenty of opportunities for inconsistency. This can lead to poor loan, pricing and risk rating decisions.
Once a decision is made on a standard and accurate global cash flow method, institutions should incorporate written guidelines that instruct individuals when to conduct a global cash flow analysis, what information is needed and how to analyze properly.
