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4 elements of an effective loan presentation

Apr 16, 2023

A loan presentation is one of the most critical documents not just in a credit file, but in the entire credit process.

A well-written, comprehensive loan presentation contains many details to assist the reader in understanding the proposed transaction. An effective presentation should tell a story and paint a picture for the reader; it’s one part science and one part art.

The loan presentation should accomplish four primary objectives:

  1. Provide the reader with a reasonable understanding of the borrower and the subject request.
  2. Provide background information and explain the need for the financing.
  3. Describe the risk in the transaction and credit worthiness of the borrower.
  4. Support the rationale for the credit decision and loan grade.

Having a high-quality loan presentation product is a vital step towards well-informed approval decisions, effective credit monitoring and a smoother third-party review. By meeting these four objectives, you can help ensure that your presentation is effective:

1. Borrower and subject

Don’t assume your reader is familiar with the borrower or the transaction. Instead, start your presentation with a straightforward overview of the basics.

This section should be matter-of-fact and include the following:

  • Borrower
  • Guarantors (both personal and corporate)
  • Purpose and terms of the request
  • Proposed loan structure
  • Primary and secondary sources of repayment
  • Loan officer
  • A recap of the current relationship with the lender, including both loans and deposits

While the subject request may be transactional in nature, it is important to include the full relationship with the lender when entertaining a new request. A borrower may have multiple loans with the lender, and while each loan transaction should stand on its own, in most instances the individual loans are not siloed.

2. Background information

Next, the presentation should provide the reader with pertinent background information, current events and describe the need for the subject financing.

Presentations are often written with the assumption that the reader is the internal credit committee who is already familiar with the borrower. They may omit critical background and current event information necessary to understand the borrower and the need for the subject financing.

Effectively providing background information requires balance. You don’t need to include a recap of everything that has happened during the past 20 years. At the same time, you don’t want to omit so much information that the reader can’t understand the borrower’s business.

This section may also include commentary on the guarantors and their role with the borrower. And you can add a sources and uses table to provide a recap of project financing.

3. Risk analysis

Risk analysis and mitigation are the meatier parts of a loan presentation. When covering risk analysis, be sure to include the following:

Financial statements: The first step is spreading the financial statements. Some lenders spread the statements right in the loan presentation, while others include attachments at the end with a recap in the body of the presentation. However, in both cases, there should be more than just simple spreads.

The balance sheet analysis should include ratio analysis and commentary on items such as liquidity, leverage and trends. Likewise, the income statement needs to be analyzed for trends such as revenue growth, margins and profitability, and should also note any adjustments for items such as one-time expenses.

Noteworthy items should be highlighted and explained if possible. This may require going back to the borrower for explanations.

This step is frequently overlooked but necessary. Without it, the reader is forced to make assumptions, and inaccurate assumptions can lead to inaccurate results and poor approval decisions.

Cashflow: Once appropriate spreading and analysis is complete, cash flow can be analyzed.

If the borrower has outside debts, a debt schedule should be completed. This helps ensure all required debt payments are properly included so that debt service ability can be calculated.

Debt service ability is often the biggest driver in determining the borrower’s ability to repay debt. After all, repayment of the loan per the terms of the contract is ultimately what lenders want to see.

Collateral analysis: The collateral analysis should include a collateral table with the following:

  • A description of the collateral
  • The value of the collateral
  • The source of the valuation
  • Appropriate advance rate and indication of any primary liens impacting the collateral position of the lender

This should only include perfected collateral while including all collateral pledged in the table. Additional commentary may be appropriate to describe specific assets and lien positions.

Level of risk: An objective grading matrix is a useful tool to measure risk based on the lender’s own criteria.

The matrix should primarily use objective criteria, such as debt service coverage, collateral coverage, liquidity and leverage. But certain subjective criteria, including collateral type, guarantor strength and strength of management may be considered as well.

Different matrices may be used for different loan types as certain factors are more relevant in certain loan types than others.

Monitoring tools such as covenants and financial reporting requirements should also be included in this section.

Loan covenants — for example, borrowing bases, minimum debt service coverage, maximum leverage levels and minimum liquidity levels — communicate the performance expectations the lender has of the borrower. As such, covenants should be clearly defined and communicated to the borrower.

Covenant violations create early warnings of potential issues with a credit. Financial reporting by the borrower and guarantors allows the lender monitor performance and any significant changes (good or bad) in the financial condition and ability of the providers. It is also important to note any underwriting or policy exceptions in this section.

4. Rationale

Finally, the loan presentation should provide rationale for the approval and loan grade.

A well-written and well-developed loan presentation should lead the reader to the same conclusions as the lender. There should be sufficient detail to support both the conclusion to approve the request and the risk rating conclusion based on the lender’s risk parameters. And evidence of approval should be contained within the presentation or attached to it.

Consistency across the organization is essential when analyzing and grading credits.

While a centralized approach to underwriting and analysis generally provides a more consistent product, a decentralized approach can work as well. However, it requires additional controls and oversight to obtain the same consistency in the final product.

How Wipfli can help

Wipfli understands the challenges financial institutions face with underwriting risk. Our team includes experienced lending professionals who are ready to guide you through best practices and strategies to help you be confident in your risk management. Contact us to learn more about how our loan review services can help strengthen your institution.

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Eric E. VanDoren, CRC
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