What is Commercial Lending Training?
Commercial lending training targets lenders and credit professionals who are involved in commercial lending. The training equips professionals with knowledge on how to conduct background checks on potential borrowers. Lenders need to determine a borrower’s ability to utilize the funds effectively to generate additional cash flows and meet debt obligations.
Commercial lending is a lending arrangement where banks lend out money to businesses or corporate entities at a predetermined interest rate. Consequently, commercial lending training involves providing training to credit professionals on the basics of commercial lending and how they can undertake analysis to determine the financial ability of a potential borrower.
- Commercial lending training involves equipping credit professionals with skills required to assess the financial strength of an entity to determine their eligibility for credit.
- Commercial lending training can be offered through online classes, traditional institutions, or self-study.
- The training teaches credit professionals on how to conduct credit investments, assess credit risk, analyze financial statements, and understand commercial lending loan terms.
Areas Covered in Commercial Lending Training
Commercial lending training covers the whole process from collecting information from potential customers to approval and subsequent disbursement of funds. The training participants are introduced to the basics of measuring credit risk, analyzing financial statements, and interpreting credit reports to determine the eligibility of the borrower for the loan. The goal is to find deserving businesses with the capacity to utilize the funds effectively while reducing the risk of incurring losses for the lender.
The following are the key areas covered in commercial lending training:
1. Credit Risk Measurement
Credit professionals learn how to measure credit risk and handle loans with different levels of risk. The training gives credit analysts a greater understanding of the entire lending process from assessing the level of risk involved in lending to a customer, the probability of default, and the amount of loss that the lender would suffer in case of default.
Credit analysts also learn how to assign a risk rating to the potential borrowers, depending on the amount of risk assessed. The credit rating assigned determines whether or not the lender will extend the credit to the borrower. A loan application from a client with a high-risk rating may be rejected, or the lender may decide to extend credit at a high interest rate that compensates for the high level of risk.
2. Commercial Lending Terms
The training covers the terms of commercial loans that lenders provide to corporate borrowers. Usually, financial institutions that provide financial loans prefer lending in the short term since the amount of credit is usually low. However, commercial lenders prefer lending in the long term, since corporate borrowers require a large amount of credit to finance expansion, an acquisition, or the launch of a new product line.
A long-term commercial loan requires a repayment period of between five to 20 years. It takes longer to mature to allow the entity to invest the funds and service the debt using proceeds from the business. When providing a commercial loan to a corporate borrower, a lender may charge a prepayment penalty, which guarantees a fixed return on the loan.
Although short-term loans are less common with corporate borrowers, SMEs can borrow short-term funds to finance temporary deficits or short-term projects. Short-term commercial loans mature in two to five years, and they are less expensive than long-term loans. Businesses can use the loans to finance a shortfall in working capital, pay urgent operating expenses such as salaries and utility bills, and also meet budget deficits.
3. Credit Investigation
Credit investigation refers to procedures undertaken by financial institutions to determine the ability of a corporate borrower to honor their debt obligation. Commercial lending training enables learners to understand key credit investigation procedures. The procedures are used to verify a client’s actual income, business valuation, the value of collateral, as well as their credit history. Credit investigation enables the lender to determine the financial health of an entity and its ability to meet the debt obligations within the required period.
If the lender finds any of the provided information to be false or inaccurate, it can either reject the application or request for audited financial states that provide accurate financial data. Credit investigation may also involve visiting the client’s business location to ascertain the correctness of financial information. For example, the credit analyst can verify that the collateral provided actually exists and if the assigned value of the asset equals the appraised or standard industry valuation.
4. Financial Statements
Financial statements such as the balance sheet and cash flow statement are some of the documents required during credit evaluation. Commercial lending training equips credit professionals with skills on how to evaluate key financial statements to determine the financial strength of an entity and its ability to generate sufficient cash flows to service the debt.
For example, the lender can use the financial statements to determine whether an entity has enough liquidity to make principal and interest payments. The financial statement can also reveal the entity’s spending habits by showing the amount of overdrafts and cash reserves in the company’s books.
Equipping credit professionals with skills required to analyze key financial statements and make conclusions can help protect the lender from risky lending activities and distinguish between good and bad borrowers.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: