How can I learn how to underwrite a small business loan?
During a job fair a local bank took my application, then later called me for an interview. The position is for a small business underwriter. I have experience in banking and insurance, but most of my banking experience is with mortgages so I'm a little weary about how this interview will go. The job description talks about performing the collateral analysis, new SBA loans, and equipment leases. A lot of what I see online is regarding commercial real estate property or commercial properties that already are in business.
Any idea on how I would learn about how to underwrite new business loans, equipment leases, and performing the collateral analysis so I can have an idea of what I'd be doing before the interview. The HR rep at the bank was not helpful at all regarding this, but just said to study up on my excel. Youtube didn't have much on what I'm looking for, so I'd appreciate anyone that can offer me some information.
I have a little knowledge of some of those...
For collateral analysis you will want to look at a company's AR, Inventory, and Equipment/leases. For AR and Inventory, you want to focus on agings and items that may be "inelligible". You are looking for things that you can reliably count on selling if needed. So slow-moving inventory or AR from a customer with lots of delinquent AR is no good. For equipment and RE, you'd likely look at NOLV or realizable value if liquidated. There's lots more in depth here that you could go, but if you can speak intelligently about what is good AR/Bad AR and good inventory/bad inventory you should be fine.
Other thing to consider are payables and fixed charges. Lots of smaller loans use a FCC (Fixed Charge Coverage) that takes cash flow / fixed charges and requires a 1.2x or greater number (1.0-1.4x is common requirement). You want to make sure cash flow is reasonable, sustainable, and if not, the collateral is sufficient to cover the borrowings. Things like DSO, DPO, Asset turnover, Inventory turnover, etc. are useful ways of looking at analysis. I would google/familiarize with some of the evaluation metrics.
Just my $.02, I'm no expert in this area but I've been in the "shit, I need help understanding what this stuff is about" stage before an interview.
Great post above, just some additions below:
A lender is always considering what are a company's risks and mitigants (if any). If any of the listed risks become deadly for the company, will the lender be able to recoup its loan with the collateral available from the borrower?
If a borrower was to default It would be the most cost and time effective for a lender to collect or sell off the most liquid assets - cash is more liquid than AR, AR is more liquid than Inventory, Inventory (depending on the type) is more liquid than fixed assets.
Within these asset classes there are also somewhat obvious nuances, is the AR from fortune 500 companies or mom and pop stores? Its much easier to collect AR from Microsoft than 500 corner stores scattered around NYC. Is the inventory every-day sort of stuff that is in demand, or is it "fad" based or private label?
Banks will hone in keenly on leverage ratios, because no lender wants to be the sole source of funding for the company. Therefore, banks will typically want the borrower to have a 3:1 debt to net worth ratio. Asset Based Lenders can stomach much higher leverage because they deeply study and lend specifically against the collateral (AR and Inventory).
This is just a brief summary, and I could go on forever, but if any kid walked into an interview and could say this to me, I would be impressed.
Thanks for all of the help so far. Those are some great suggestions on where to start.
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