ineffective some of the common tools can be at identifying changes in risk. In addition to the standard reporting requirements that community lending institutions have relied on to monitor the ongoing risk associated with a loan, the following indicators have come to the forefront during the pandemic as helpful early warning signs of potential problems: • Rent rolls that provide information on tenants and rents in commercial property can be extremely helpful in assessing the ongoing repayment capacity of the borrowers. They can be particularly useful during the first quarter of the year as a proxy for annual tax return reporting, which is frequently delayed by extensions of the filing date. • Verification of liquidity for borrowers or guarantors is considered a significant factor in the underwriting decision. • Use of Smith Travel Research, or “STR,” reports for hotel/motel borrowers monitors trends in occupancy, average daily rates, and competitive market position. • Site inspections verify property condition and occupancy, which also helps detect any potential deferred maintenance and needed capital expenditures. • Field audits verify accounts receivable and inventory for borrowing base lines of credit. Communication is key In light of the ongoing macroeconomic pandemicdriven challenges affecting commercial and agricultural enterprises, it’s critical for lenders to combine continued credit risk diligence with enhanced borrower communications. Financial institutions can get a much better understanding of changing risk profiles when they talk to borrowers on topics including: • Constraints on production or service delivery due to supply chain disruptions, such as a lack of raw materials, component parts, or labor; • Unexpected weather events such as hurricanes, floods, or wildfires that affect industrial output; • Inflation pressures affecting costs of production and the (in)ability to pass these increased costs on to end consumers; and • Crop insurance for agricultural production. It’s also important to remember that even when these challenges don’t apply directly to a specific borrower, they can still indirectly impact the supply chain or customer base that a borrower counts on. For instance, if a large customer of a borrower is affected by a natural disaster or a COVID-19 outbreak, that customer may be unable to purchase products as previously agreed. Don’t overlook the basics Lastly, it’s important for financial institutions to remember the following monitoring items that may have been put on the back burner while they were addressing the more immediate risks brought about by the pandemic: • Succession planning for small business or family-owned enterprises where management is concentrated in one or among a few key personnel; • Tax implications that could arise from the Build Back Better Act or other future legislation. These basic components of credit risk haven’t disappeared just because businesses have been struggling with more immediate day-to-day challenges of the pandemic. Without a doubt, the pandemic has touched just about every aspect of the business operations of our clients, and the lending area is no exception. It’s important your credit risk monitoring process relies on both time-tested and newly relevant tactics to help your credit management team remain vigilant in the pandemic landscape. WE MAKE IT EASY LET OUR TEAM HELP YOU SECURE THE DEAL AND LOWER YOUR RISK • UP TO 90% OVERALL FINANCING • UP TO 25 YEAR TERM • FIXED-RATE PREFERREDLENDINGPARTNERS.COM | 303.861.4100 Leveraged financing and refinancing of owner occupied real estate and long-term equipment. Most for-profit small businesses eligible. SBA defines businesses with net profit after tax <$5.0 Million and tangible net worth <$15.0 Million as small. July • August 2022 13
RkJQdWJsaXNoZXIy MTU2Mjk4Mw==