Most people use the New Year to reflect upon what was accomplished the last year and what we hope to accomplish in the coming year. We should be doing this in credit administration as well. Here are some thoughts about what needs to be accomplished annually with your business loans:
Annual Reviews Every significant relationship needs to be reviewed annually. By relationship, we mean all loans related to a particular borrower or principal. The entire relationship needs to be reviewed, because each loan and business venture will impact the overall financial condition of the borrower or principal. The annual review can be done any time of the year, but should be consistently done at the same time of the year every year. Often, annual reviews coincide with receiving major documentation for that review, such as, an annual audit or tax returns. The annual review for your loan relationships is like getting an annual physical. You will recalculate the risk rating and provide a brief summary of what good and concerning events have transpired for the relationship.
Annual Reporting Some relationships require the regular collection of documents, perhaps even on a monthly basis. But, once a year you should expect to receive a comprehensive report of financial condition prepared by an accountant or bookkeeping professional. These financial statements usually have more disclosure and organization than typical “interim” statements. These more comprehensive financial reports can be received anytime. Often they report a fiscal year-end of December 31st, but the fiscal year-end can be in any month. And despite what fiscal year-end the financials report, the report may not be prepared and ready for circulation for months after that date.
Tax Returns and Personal Financials In addition to receiving comprehensive business financials on an annual basis, we need to collect personal financials for guarantors. A signed personal financial statement should be collected annually, and it is good practice to annually pull a personal credit report for each guarantor too. It is necessary to collect personal tax returns as well. We know tax returns must be filed by April 15th; but often, business operators seek an extension to October 15th. If an extension has been filed, a copy of that extension receipt should be kept on file. And just because an extension has been filed, doesn’t mean the guarantor does not know anything about how their tax return will look until October 15th. Estimates of the guarantor’s tax liability must be made at the time of the extension. I find it is good practice to ask if a draft of the tax return or if any pertinent personal filing information can be provided. While this is not considered finalized until taxes are filed, it is better than not having any estimate before October 15th.
Policies Internal policies should be reviewed and updated on an annual basis as well. The new year is a good time to consider necessary changes to your loan policy so that your Board of Directors can approve it in their annual meeting that approves polices. This would also be a good time to have a meeting to address any misunderstandings with policy to make sure everyone is interpreting policy the correct way. These practices will make your institution more robust by adapting and improving your lending practices.
Staying on top of your annual duties is critical to the health of your institution. Regular servicing through review and collecting updated financials keeps the risk in your loan portfolio well-identified. Assuring your institution has the proper policies to identify risk will keep your organization happy and healthy in the New Year!