SELECTING A FINANCIAL INSTITUTION 

Prospective borrowers who are well matched with prospective lenders have a higher probability of approval.  The borrower may score well under all of the quantitative and qualitative criteria of the LDM, but if the financial institution is not seeking the type of customer or loan requested, the request may still be denied.

Loan portfolios are constructed around current asset/liability management policies, which are as cyclical as the economy.   Asset/Liability management affects the maturities currently desired by the financial institution, as well as the rates and terms.

To reduce interest rate risk in the loan portfolio, lenders try to match maturities and average yields on loans to the maturities and average rates of the deposits and other instruments that comprise their sources of loanable funds.  Large financial institutions often hedge interest rate risk by buying/selling interest rate swaps.  Determining the institution’s preferred loan type will help avoid spending valuable time approaching a lender who may not be appropriate for the client’s request.   Keep in mind that a lender’s primary objective is to maximize their interest margin, and loans generally offer a higher margin than government bonds.  So, lenders prefer to make loans, as long as the risk is mitigated by terms and price.

The following list of questions will help you select a lender that will be most appropriate for the loan request.    Some of the questions below deal with the lender’s asset/liability policy, and others deal with the borrower/lender relationship.   Finding the right lender for your needs is valuable in securing a loan.



Questions for Prospective Lenders:  (we’ll assume it’s a bank)

1.	Is this a community bank (locally owned and operated) or a holding company affiliate bank?

2.  	Are the bank’s loan policies determined at the local level or at the regional level?

3.	If the bank is sold or merged with another financial institution, will existing loans be affected in any way?

4.	Does the bank make consumer and business loans?   Are there separate divisions, or can the loan officer handle both types?

5.	Does the bank have experience making loans to this type of business/industry?

6.	What is the maximum size and maturity of loans your bank will make?

7.  	Do loans over a certain amount require Loan Committee approval?  If so, when and how often does the Committee meet?

8.	How much latitude does the loan officer have in structuring the loan terms?

9.	Will the loan be carried in the bank’s portfolio, or sold in the secondary market?    Will the servicing be outsourced?

10.	Will compensating deposit balances be required?  If so, how will the interest rate on the loan be affected?

11.	How does the bank compare to other lenders in the area with regard to rates and terms on this type of loan?

12.	How quickly will the request be evaluated and the loan approved/denied?

13.	If for some reason, the request is denied, will the reason be stated in writing?  Will the bank offer an alternative structure or terms in lieu of those requested?

14. 	Can the loan terms/price be restructured prior to maturity to suit the needs of the business?

15.	Are there customarily Fees or Penalties for Early Pay Off?