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Think Like a Banker -- Collateral Assessment
Collateral is needed in order to obtain financial loans from banks as well as other debt nstrments from non-deposit lenders. Most often land or buildings, collateral must be appraised and its value must be calculated properly. Knowing how “bankers” assesss these values will arm you information you need to step up confidently to the conference room table. This white paper will overview some of the analytic tools and frameworks used to conduct credit analysis. It is more than just an introduction to the structured approach to evaluating corporate borrowers: purpose, payback, risks to repayment and structure, after reading it, you’ll understanding the market's perspective of risk & return. This white paper is designed to help you get inside the mind of a banker and get educated on the possible leverage alternatives for commercial borrowers. After diving in, you’ll have an introduction to the decision process of a banker when evaluating loan applications of which the major portion is collateral assessment by focusing on the importance of the analysis of repayment capability and of collateral types and valuations. Welcome to the wonderful word of blue suits and short workdays. For some, this trip inside the mind of a banker can be like traveling to a foreign country, so buckle up for culture shock. Grey beards and blue hairs understand that banker’s depend on the “five Cs of credit1,” and define them as follows:
Commercial banks enjoy protecting their money even more than they enjoy lending it out, and each of these five characteristics is an important factor contributing to the loan consideration process. As such, it becomes all-important for any lender in the collateral assessment procedure also. The following describes the interwoven relationships between the five and exemplify the importance of each, stressing the significance of collateral in commercial borrowing. Sit back and enjoy watching the tapestry develop. Collateral analysis or “reviews” as they are called in the industry begin with a best-case scenario of the business’s capacity to cover the servicing of the debt. It is sort of like when you walk through an all-you-can-eat buffet line and try to figure out how much food you can possibly put away without exploding your intestines. Same basic idea here. Evaluation is best done by assessing the current financial statements of the target company which essentially dissect the potential assets in question, while implementing rational expectations of the corresponding changes -- to revenues and expenses -- which will result from the new investment. In reality it’s part science and part art, part objective and part subjective. So the better you know the person conducting the analysis, the more likely you are to get a favorable appraisal. Sort of like when you are selling a house: you offer the appraiser a soda and chitchat to make absolutely sure he knows the asking price. [continued...] Want to know more? Download the White Paper "Think Like a Banker -- Collateral Assessment" for just $39.95. |
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