Transcript: CIBC US Financial Toolbox podcast, Episode 3 — Understanding the business loan cycle
>> Narrator: Welcome to Financial Toolbox, a podcast series sponsored by CIBC Bank USA that understands that financial wellness is not innate, it's learned. Whether you're a member of the next generation wanting to start your financial journey out strong or you're a lifelong learner looking to improve your financial standing moving forward, our team of experts are here to equip you with the information you need to help make your ambitions a reality. And now for this week's episode.
>> Marilyn Lawrence Payne: Hello and welcome to Financial Toolbox. My name is Marilyn Lawrence Payne, and I have the privilege of serving as a community development relationship manager for CIBC US. I'm pleased to be one of your hosts today. For this episode, we will discuss understanding the business loan cycle. Joining me today to discuss further is Kevin Brooks, team lead community development relationship manager here at CIBC. Kevin, welcome and thank you for joining us today.
>> Kevin Brooks: My pleasure, and thank you for having me.
>> Marilyn Lawrence Payne: Today we're going to cover a broad view of the business loan process with some behind the scenes perspectives from two seasoned lenders. We also will provide some do's and don'ts for entrepreneurs seeking funding. Kevin, can you explain for the listeners what the business loan cycle is?
>> Kevin Brooks: Yeah. Thank you, Marilyn. In response to your question, the business loan cycle refers to the stages a business loan goes through from the application phase to repayment. When we assess the life cycle of a business loan, it is essential to recognize that each banker has unique processes and also experiences aimed at providing the potential borrower with exceptional lending and unparalleled customer experience. Typically, this process begins with various key components that we will cover today, which starts with loan sourcing. This is where we find borrowers and opportunities. So a significant portion of this involves the preliminary efforts of the banker and identifying opportunities through an array of sourcing channels. So for example, personally I prefer sourcing outlets such as community referral partners, commonly known in the banking sector as center of influences, or COIs, as well as networking events, word of mouth marketing and internal referrals with our various lines of business here at CIBC. So through these avenues, we are able to develop strong relationships that support us to comprehend the needs of our clients.
>> Marilyn Lawrence Payne: Thanks for that thorough explanation. We understand that the lending landscape can be complex to navigate, so I wanted to share with our listeners looking to start a new business or scale an existing one, some information on how to source business funding along with steps to take and questions to ask. First, assess your financial needs. Ask yourself, how much capital do I need and what will the funds be used for? This could be for startup costs, supplies and inventory, payroll, rent, equipment, or acquisition. Next, can you afford it? We'll explore this further later. We finally, who's the right lender for you? There are a variety of options from traditional lenders like banks and credit unions to federal funding sources like the SBA, microfinancing from community development financial institutions, crowdfunding, and others. Questions you may ask a lender may include, what loan options do you offer for my business type and stage? What are the interest rates and repayment terms? What are the qualifications around credit score, revenue or collateral? How long is the approval process? Are there any fees or prepayment penalties? Before we move on, Kevin, was there anything else that you wanted to share around loan sourcing?
>> Kevin Brooks: Yeah, thank you for that question. In my opinion, establishing relationships is essential. As bankers, we usually follow up on any type of sourcing leads and arrange an initial consultation meeting, which can be conduct in-person, virtually, or via phone. So this meeting provides us with an opportunity to gain a deeper understanding of potential clients. Usually, I make it a practice of mine to understand an individual character in the beginning. I truly believe that this forms the foundation of our relationship and future interactions. During this discussion, we also explored the client's ambitions, both short-term and long-term business goals, the purpose of the loan and their funding requirements. Additionally, we conduct a preliminary assessment of the borrower's financial situation and credit readiness based on the initial information provided from the client. Another best practice during the initial sourcing phase that provides us value is early guidance on financial readiness to assist prospective borrowers in comprehending the bank's criteria as well as the potential associated terms and conditions of the loan. Look, we all want our clients to understand all the fine print and terminology that will be used. In conclusion, your banker serves as your advisor, and why many borrowers possess a clearer understanding of the borrow requirements. It is the responsibility of your banker and the underwriting team to assess and analyze the associated risk. In my opinion, this evaluation is crucial to confirm that you have the ability and means to repay the loan amount to the bank.
>> Marilyn Lawrence Payne: Okay, now let's get onto the fun part, application and documentation. I'm happy to take this one. When applying for a business loan, a business owner typically needs to provide several key documents to demonstrate their overall financial stability and ability to repay the loan. During this process, the business owner applies for the loan and provides financial documents that often include a business plan outlining your company's purpose and goals, products and services, marketing strategy, operations management, and financial projections. Other documents include two years of personal and business tax returns, as well as financial statements such as profit and loss statements, balance sheets and cashflow statements. These documents are essential to lenders in making an assessment of the company's financial health. Kevin, can you share what other documentation may be needed to complete a business loan application?
>> Kevin Brooks: Yes, so some additional documentation that lenders may request during the lending cycle are banking statements to evaluate cashflow as well as legal documents such as business licenses, articles of incorporation or partnership agreements. Lastly, a debt schedule listing all current liabilities may be needed along with personal financial statements from the business owners. Marilyn, if you don't mind, I want to take a deeper dive into the borrower's valuation phase. This is where we as lenders evaluate the credit and risk analysis. To the listeners, this phase really helps us determine whether to approve or deny a loan and what terms to use. The bank conducts an evaluation of the company's financial stability, cashflow, and ability to repay the loan. The lender then moves into what the bank calls the credit evaluation phase, where they assess the business credit worthiness by reviewing credit reports, payment history, or any other risk that may need further investigation.
But notice in my last sentence, I mentioned the word risk. This is something that is very critical in the life cycle of lending. The overall industry stability, business performance, and economic conditions may affect the borrower's repayment ability. Another key component of this step is the debt service coverage ratio or the DSER analysis. Where the lender measures the company's ability to cover its debt obligation. So in other words, is the business producing sufficient income? The lender also wants to evaluate the collateral of a business based on the company stage in business. This assessment involves examining the value and liquidity of the assets presented as security. In certain instances, this may also include real estate, equipment or accounts receivable of the business, and generally the bank aims to confirm the value of the collateral matches with the loan amount to mitigate the risk of potential default. Within this practice, the bank will often take a UCC lien on the business assets as collateral for a loan.
>> Marilyn Lawrence Payne: Okay, so now let's discuss loan structuring and underwriting. When you're applying for a business loan, whether it's $10,000 for equipment or $100,000 for expansion, how a loan is structured is critical in whether your business thrives or struggles under debt. Loan structuring is essentially how the bank builds your loan. That includes how the type, the amount and term aligns with how proceeds will be used and how the loan will be paid back. The underwriting is the process lenders use to assess your risk and determine if the structure makes sense. This is huge because if we get this part wrong, you may either not get approved or worse, get approved for something that doesn't actually help your business long-term. Here's the breakdown to key considerations in loan structuring. As mentioned earlier, always start with the Why, the purpose of the loan. Are you buying equipment that will generate revenue? Do you need working capital to make payroll or buy inventory? Different purposes call for different types of loans. For example, equipment purchases are typically best served by a term loan. Seasonal inventory would be best served by a line of credit. We also want to consider the use of the proceeds. Lenders want to know how every dollar is spent, so list it out. When the use is clear and tied to business growth or cashflow improvements, the loan becomes much more appealing. Short-term versus long-term needs is also critical. Shorter term borrowing needs are usually less than 12 months. These funds may be needed to bridge the gap until receivables come in. Long-term, borrowing needs are over 12 months, for example, buying a van or renovating your space. We also match the loan term to the asset's useful life. You don't want to pay off a five-year loan on technology or equipment that will be outdated in two years.
Next question is the repayment strategy of when you will have the cash to repay the loan. Lenders may evaluate how quickly your customers pay you. Also, will this investment generate immediate or delay returns? Before we move on with this point, I would like to give an example of proper structuring. Let's say you're a landscaping business and you need a total of $50,000, $30,000 for a new truck and $20,000 for hiring and marketing. The bank may provide a $30,000 five year term loan matching the truck's useful life, and $20,000 revolving line of credit to cover seasonal expenses you can cover through revenue. As previously mentioned, loan type is also considered during the structuring process. Other considerations for loan terms outside of the repayment period are the interest rate and frequency of payments. Finally, conditions and covenants lenders may require, may be personal guarantees, no additional debt without lender approval or debt service coverage ratio as discussed earlier. Kevin, what else would you like to share on this step of the process?
>> Kevin Brooks: Yeah, so the next is the risk assessment and approval, which is very critical part of the process. For an example, the underwriter evaluates all factors and submits the loan for approval, which may go through a loan committee depending on the loan size and risk. The next is the conditional approval. If approved, a lender issues a term sheet or commitment letter defining all conditions on the loan, and last is the compliance check. The lender ensures that all regulatory and internal requirements are met.
>> Marilyn Lawrence Payne: Moving on to closing and funding. So final documentation. The borrower executes legal documents, which encompass the promissory note, loan agreement and security agreements if applicable. Both parties verify that all documents have been signed and that all conditions have been satisfied. The borrower is provided with copies of all agreements for their records. The disbursement of the funds to the borrower's business account may be required to occur either in full or in installments, or alternatively, the funds may be deposited into the lender's business account contingent upon the type of loan.
>> Kevin Brooks: The final phase of the business lending cycle is the post-closing and loan servicing. In my opinion, this is the overall due diligence and service for our clients to ensure that we move forward to relationship and value proposition of the bank. During this process, the bank, along with its lenders, engages in ongoing portfolio management where we monitor the financial health of the business. So lenders may request regular financial reports or require annual note renewals to assess the business performance, ensuring it remains in good standing. The next is repayments and compliance, where the borrower makes regular scheduled payments adhering to loan covenants, and the last is refinancing, servicing or modifications. If a business needs any change, refinancing or restructuring may be considered. As we move forward in the relationship, we provide continuing resources and opportunity to our clients to show the value by uncovering potential ideas or simply making recommendations to help you scale and grow your business.
>> Marilyn Lawrence Payne: Kevin, thank you so much. It's been very enlightening hearing your perspective. Thank you all for joining us on our podcast with a focus on understanding the business loan cycle. If you have any additional questions, please reach out to your relationship manager at CIBC to assist. You can also check us out at cibc.com/us or across several social media platforms by searching at CIBC_US. Thanks for listening. We look forward to catching up with you again soon.
>> Narrator: CIBC Bank USA member FDIC, equal housing lender, MLS number 619817. All consumer and commercial banking products and services are subject to credit and approval. Investment products offered are not FDIC insured, may lose value and are not bank guaranteed. To the extent that information contained herein is derived from third party sources, although we believe the sources to be reliable, we cannot guarantee their accuracy. Guests from CIBC Bank USA are not paid for their participation. The CIBC logo is a registered trademark of CIBC, used under license copyright 2025 CIBC Bank USA.
