What is Commercial Loan Documentation Training?
Commercial loan documentation training is formal training provided to financial institutions and credit professionals who are involved in commercial lending. The training provides credit professionals with a greater understanding of the documentation involved when making loans to corporate borrowers.
Commercial lending mainly involves lending to small- and medium-sized enterprises (SMEs), and lenders may require the entities to provide specific documentation related to their businesses. The documentation required may include collateral documentation, business plan, business debt schedule, profit and loss statements, bank statements, promissory notes, commercial loan agreements, loan guarantees, etc.
- Commercial loan documentation training equips credit professionals with knowledge of key documents that they encounter when reviewing a loan application.
- The main forms of loan documentation include collateral proof of ownership, business plan, promissory notes, and debt schedules.
- The training exposes credit professionals to key concepts and principles involved in the loan documentation review process.
Why Commercial Loan Documentation Training Is Required
The loan documentation training exposes credit professionals to key principles and concepts involved in the loan documentation process. Credit professionals learn the different types of documents that are required, why they are required, and the specific time in the review process that the documents are required.
Key professionals who may enroll in the training include individuals who prepare documents related to commercial lending, staff who verify financial reports, as well as other credit professionals who need to improve their loan documentation skills.
Components of Commercial Loan Documentation Training
1. Collateral Documentation
The training equips credit professionals with skills on how to review the collateral documentation in order to determine the adequacy of the collateral in relation to the amount of loan applied. The collateral documentation shows the assets that the borrower is providing as collateral, and it acts as proof of ownership of the asset. The collateral shows the borrower’s commitment to servicing the debt, and its value should be equal or more than the amount of loan applied.
If the borrower is unable to make prompt debt payments, i.e., principal and interest payments, then the lender is authorized to auction the collateral to recoup the cost of the loan. For example, when taking a mortgage, the property being acquired can be used as collateral for the loan. The borrower should provide documentation that acts as proof of ownership of the property, as well as an appraisal, which serves as proof of the market value of the property. If the borrower is unable to service the debt, the lender can auction the property to recover the cost of the mortgage.
2. Business Plan
The business plan provides the lender with important information about the borrower’s business or specific projects that the borrower plans to undertake using the credit. Some of the information that credit professionals consider in the business plan may include the marketing strategy, financial forecast, management team and their experience in the business, as well the current operations of the business.
The business plan should provide information on how the business intends to carry out a project, strategies, and methods that it will use to accomplish the goals. Credit professionals can review the business plan to determine the viability of the project to be funded and assess the level of risk involved in lending to the borrower.
If the analyst is convinced that the project is viable and that the company possesses the ability to repay the debt in time, he/she makes a recommendation to the credit committee.
3. Promissory Notes
The commercial loan documentation training provides greater understanding to credit professionals on how promissory notes work and why they are needed. The training participants learn how to differentiate between a promissory note and a loan agreement. A promissory note is a written promise signed by the borrower, promising to pay the lender an agreed sum of money at a specific date or on-demand.
Most lenders may require the borrower to provide a promissory note before a loan application can be approved since the promissory note acts as a liquid asset that the lender can transfer or sell to a debt collection agency. The training equips credit professionals with skills required to verify if a promissory note is genuine and if it contains all the essential elements required to make it a legal document.
4. Commercial Debt Schedules
Loans documentation training also equips credit professionals with knowledge on commercial debt schedules and how they are evaluated. Debt schedules provide information on the amount of debt that an entity currently holds and how it plans to pay them off. The debt schedule can also provide insights into how the company settles its existing obligations and its ability to handle additional obligations.
Irregular or missed debt payments often paint a negative picture of the creditworthiness of a borrower, and the lender will be taking too much risk lending to such an entity. Teaching credit professionals how the commercial debt schedule works can help the company identify credit risks in advance before the application goes to the approval stage.
5. Purpose of Loan
Credit professionals are required to evaluate the purpose of the loan in order to determine its viability and if the credit requested is enough to finance the project to completion. The borrower is required to disclose how the loan will be used and provide a quote of the amount required to finance the project.
For example, if the borrower intends to use the loan to finance the acquisition of equipment, it must provide the lender with a quote for the cost of equipment, installation costs, and maintenance costs for the period of the loan.
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