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Previous Issues
Issue 30: Loan Sale Premiums Hold Steady in November

Issue 29: Proper Risk Management Protection and Credit Worthiness

Issue 28: BoeFly Helps Veterans With Disabilities Connect With Lenders to Obtain Small Business Loans

Issue 27: Loan Sale Premiums Level off in October

Issue 26: SBA Secondary Market changes - Warranty Period and Premiums on New Larger Loans

Issue 25: BoeFly Surpasses the $1 Billion Transaction Mark

Issue 24: Loan Sale Premiums Continue Climb in September

Issue 23: Robert Tannenhauser, CEO of BoeFly, Interviewed by Michael McKee on Bloomberg Radio

Issue 22: Lender Optimism is up While Anxiously Awaiting the Small Business Jobs Bill

Issue 21: Loan Sale Premiums Blast to Record Highs in August

Issue 20: Title Insurance- the Lender's Perspective

Issue 19: Condemnation and Mortgage Lender's Rights

Issue 18: Long-Term Deals Continue Record Climb; Short-Term Deals Fade

Issue 17: Congressman Walt Minnick (D-Idaho) Gets It

Issue 16: Deeds and Forms of Ownership

Issue 15: SBA Loan Sale Premiums Hit Record High in June

Issue 14: What You Need to Know About Property Insurance

Issue 13: SBA Fixed Interest Rate Loans are an Important Product to have at the Ready

Issue 12: 504 Guaranteed Pool Program Summary and Survey Results

Issue 11: Loan Sale Premiums Surge to Record Highs in May

Issue 10: Environmental Risk for Lending Opportunities

Issue 9: How To Take Advantage of the First Lien Position 504 Loan Pool Guarantee Program

Issue 8: Investors Remain for SBA Loans

Issue 7: Retirement Funds for an Equity Injection - Selecting the Right Plan Provider

Issue 6: Why Outsourcing Environmental Risk Management makes Cents for Lenders

Issue 5: Loan Monitoring: Comfort in a Crisis

Issue 4: BoeFly Case Study: The economics of selling SBA guaranteed loans

Issue 3: BoeFly Lender Survey Results Q1 2010

Issue 2: Loan Sale Premiums Rally in Q1

Issue 1: The Importance of Efficiency in Secondary Markets

Loan Monitoring: Comfort in a Crisis

By BoeFly Member John L. Szajna, President, Banking Syndicators of America, Inc.


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Pledged collateral shouldn't be relied upon to ensure loan repayment. Instead, regular cash flow monitoring is the only way lenders can understand their borrowers' financial state and to be empowered to take action before it may be too late to recover.


Top lenders rely upon quarterly monitoring but with the inevitable delay it can be 5 months for a lender to realize that there is a problem. By that time it may be too late. Leading edge banks are now turning to technology to access borrower bank activity to actually monitor cash.


One lesson that can be drawn from the current credit crisis is that a lender can be beset with horrendous loan losses even with the best underwriting. Why? There are predominantly two reasons: First, the backstop to effective underwriting is collateral. In a downturn with the depth and breadth of the current one, the value of pledged assets fell to historic lows. This created a disconnect to their market value at the time of underwriting. Second, if a lender's first notice of slipping performance is a monetary default, the borrower may have dug such a financial hole by that point, that no viable remediation options may exist. Given these reasons, more effective loan monitoring is required to better support loan underwriting.


Effective loan monitoring does more than just reduce loan losses. The capability to effectively monitor a loan can reduce a lender's reliance on collateral. This is especially important in restaurant financing. With the value of restaurant equipment at historic lows, business assets will often not sufficiently collateralize a restaurant loan. On the bright side, if a lender is considering a remodeling or expansion loan for a business with solid cash flow performance even in this down economy, loan monitoring enables them to focus more of the financing decision on the strength of the borrower's business than the strength of the assets to be pledged. For any loan, effective loan monitoring can allow for the safe reduction of collateral as stable cash flows are achieved.


To avoid finding out about a borrower's potential monetary default too late, the current best practice for loan monitoring is quarterly financial statement analysis. Whether arrived at intuitively or via analysis, lenders have correctly determined that quarterly financial statement analysis is not cost effective at lower loan amounts.


To be sure, an accurate cost/benefit analysis requires the lender to determine the value of the analyzed data as an early warning tool. This valuation must consider the timeliness, accuracy, and effectiveness of the information.


Quarterly financial statements take time to compile and the process can only begin when all the data has been collected, after the end of the period. Lenders who require quarterly financial statements often give borrowers 30-90 days to submit the financial statements. If performance declines in the first month of the quarter, it could be 3-5 months before the lender is aware of a problem. In this current economic downturn, many borrowers failed in-between reports. Timeliness is inversely related to the size of the borrower. A large firm can often survive a temporary downturn. Smaller borrowers, who are more susceptible to a temporary downturn, are monitored less due to the cost of quarterly financial statement analysis.


While timeliness is affected by the collection of data, accuracy can be affected by many variables. Improper categorization, bad use of an accounting convention, use of the wrong accounting convention, posting errors, and mathematical errors can all lead to inaccurate results. When an accountant reviews financial statements, they will only offer an opinion on whether they "materially represent" the financial condition of the firm - not whether they are accurate.


Leading edge banks are now turning to a technological solution for the pressing problem of effective monitoring. Lenders can now securely access the borrower's bank account data to track receipts and expenses on a monthly basis. As long a lender secures the borrower's permission, actual cash flow can be monitored. And by accessing accurate data months earlier than quarterly financial statement analysis - at a fraction of the cost - lenders can maximize remediation options when it still matters. Working with the borrower, the lender needs to model receipts and disbursements into revenue and expense categories. The real cash data then can be instantly categorized and analyzed to measure the borrower's health. Beyond reducing the reliance on collateral, cash flow monitoring minimizes the impairment that results from delayed discovery of a problem.


Loan monitoring, especially Cash Flow Monitoring, provides the comfort needed in this turbulent economy.


To learn more visit John Szanja's BoeFly Services Network Profile or visit http://bankingsyndicators.com/index.asp.