3 Key risk areas in member business lending
As part of Sageworks’ ongoing video series addressing some of the challenges and questions regarding credit analysis, Garrett Morris, senior risk management consultant at Sageworks, explains the three key risk areas in member business lending.
From the video
There are three key risk areas in member business lending: Can my borrower pay, will my borrower pay, and simply what happens if the borrower does not pay? The first one (Can my borrower pay?) is probably the most important assessment within our risk factors. It looks at the financial position, the cash flow position and ultimately the debt-service coverage ratio of the borrower. Looking at the primary borrower’s debt-service coverage ratio and the global debt-service coverage ratio has become an industry trend, as well as looking at a historical perspective of the borrower’s ability to repay their debt.
The second key risk factor is: Will my borrower pay? This is really an assessment of the borrower’s character, which is very important when making a loan decision. When we’re assessing their character, we can look at management experience, the amount of time the borrower has been in business or how long the borrower has banked with our institution. We can even incorporate industry comparisons in that assessment, gauging where the borrower falls in line with their industry (hopefully, outperforming that industry).
The third and final factor is simply examining what happens if our borrower does not pay. This is a worst-case scenario, but it certainly happens, and we want to make sure we have something to fall back on in case it does. When assessing what happens if our borrower does not pay, we are most likely looking at collateral. We want to make sure that we have adequate collateral securing that loan, and that we’re in a pretty good position in terms of having access to the collateral in case our borrower does not pay or the loan goes bad. In that circumstance, it’s very important to have good appraisal data, and to make certain that appraisal data is up to date. Those are the three key risk factors in member business lending.
For more information on how the MBL landscape has changed, what risks come with MBL, and how to mitigate those risks download the whitepaper, titled: Member Business Lending Landscape. Or, register for the upcoming webinar, titled: How to Manage Risk in Member Business Lending.