A prospective borrower might seem solid until you perform an analysis of its strengths, weaknesses, opportunities and threats (SWOT). Suppose the SWOT assessment reveals that the company is vulnerable to competitors or potential threats, such as cyberattacks or financial fraud. Is it worth continuing to work with the borrower to fix these problems? Here’s some guidance to help you decide.
A SWOT analysis occasionally uncovers weaknesses or threats that could ultimately affect a prospective borrower’s ability to operate — or, at minimum, service its debt. But it also provides an opportunity for bankers: While some may choose to simply reject a weak borrower’s application, others might decide the loan is worth funding and attempt to help the borrower to address the SWOT analysis findings and reduce the risk of default.
The following questions can help you decide whether to reject a troubled borrower’s application:
Determine the depth, magnitude and complexity of the issues unearthed during the SWOT analysis. Then validate the accuracy of the findings. This could mean engaging a third party — such as an expert in cybersecurity or operations management — to review the SWOT analysis.
Assess whether your institution has the expertise and resources to help a borrower remediate its threats and weaknesses. Alternatively, consider whether it’s in the best interests of the prospective borrower to recommend a third party to resolve issues. Before the borrower engages a third party, the banker should clearly communicate his or her expectations. For example, if the borrower doesn’t have a robust set of internal controls, there should be agreement regarding the specific control elements needed for an effective program.
While you and your borrower address threats and weaknesses, additional issues may arise that further complicate the situation. For instance, examining the internal control environment may uncover evidence of significant employee fraud. A banker can’t provide any guarantees that remediating an existing problem will automatically result in approval of the borrower’s loan request. Just in case unforeseen problems do arise, determine whether the benefits associated with the borrower’s application justify the time, effort and expense to remediate any weaknesses and threats.
Even though a borrower may seem to resolve a problem satisfactorily, the same deficiency could reappear at a subsequent date. A borrower that infrequently conducts maintenance of its production line, for example, will likely experience machine malfunctions and the inability to meet customer deadlines sooner or later. These additional delays could jeopardize the company’s ability to earn revenue. If a problem recurs, the borrower might try to conceal the issue and/or downplay its significance. In addition to addressing the initial problem, you also should have a plan to periodically evaluate the borrower’s operations.
This may require integrating a more robust level of ongoing due diligence for at-risk borrowers as part of the bank’s quarterly, biannual or annual loan portfolio review. When evaluating borrowers, your due diligence should assess a broad range of factors. This should include the company’s financial performance and ability to repay debt.
Consider adding a SWOT analysis to your ongoing due diligence regime. Uncovering weaknesses in or threats to a company’s operations doesn’t necessarily end the loan application process. Instead, you may help a troubled borrower remedy its issues. Doing so can improve the chances that they’ll satisfy their lending criteria while at the same time minimizing default risk. In the process, you’ll generate goodwill with the company’s management that will last beyond the application process.
After you complete a detailed analysis of a prospective borrower’s strengths, weaknesses, opportunities and threats (SWOT), meet with management to review the findings and solicit their feedback. How a borrower reacts can help you decide whether to proceed with the loan application.
If management questions the validity of the SWOT analysis, you may decide to reject the application on that basis alone. But it’s also possible that the borrower could identify a flaw in the SWOT analysis that triggers further analysis. After all, company insiders may have valid explanations for what someone on the outside perceives to be a controllable risk. If a borrower offers some customers 90-day payment terms, the banker may raise concerns. But the borrower may be offering such terms merely because they’re customary within the industry; and may be making them available only to customers with a stellar payment history.
Once you and the borrower are on the same page regarding the SWOT analysis, it’s critical to address whether management wants to reduce its weaknesses and threats. If the borrower prefers to maintain the status quo or isn’t willing to hire third-party consultants to improve the situation, it may be time to walk away.
For more information on Smith and Howard’s commercial banking services, please contact D. Alan Najjar at 404-874-6244.
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