Financial information collection: Four ways to improve commercial borrower compliance
- Financial statement collection starts with clear commercial borrower reporting expectations.
- Use a simple tracking system to monitor documents, due dates and exceptions.
- Send pre-due reminders to improve response rates and speed follow-up.
- Enforce reporting requirements consistently to strengthen borrower compliance.
Lenders across the country have a common complaint: It’s hard to obtain financial information from commercial borrowers and guarantors.
Financial institutions face two key challenges:
- Increased need for timely financial information in uncertain markets
- Limited resources to monitor and follow up on missing or outdated documents
This has made it challenging to collect financial statements, tax returns, rent rolls and other key documents from clients expeditiously.
Follow these four tips to collect timely and thorough financial information from commercial loan clients of every size:
1. Set clear expectations for financial reporting
Many financial institutions use boilerplate language requiring annual reporting that may not apply to the loan at hand.
That means borrowers may ignore the language and other requirements.
Here’s what to do instead:
- Make expectations clear and have borrowers confirm them at the start.
- Include detailed financial reporting requirements in your loan agreements and discuss the requirements with borrowers at signing.
- Consider designating space on loan documents for borrowers/guarantors to initial each reporting requirement.
- Alternatively, create a standalone agreement to provide financial statements in the event this language is not included in a loan agreement. This could be as simple as a one-pager listing the financial reporting requirements, signed by the borrower.
2. Track commercial loan document collection
Document collection is recurring, so financial institutions need strong systems to monitor and follow up with borrowers.
Financial institutions can use reporting software or manually update Excel spreadsheets to track documentation. A strong system doesn’t have to be sophisticated. Implement a system or process and be disciplined about keeping it up to date.
Ideally, your system will identify individual items that are required from each borrower/guarantor, along with filing and exception dates.
3. Send borrower financial statement reminders
Send formal reminders before the due date. It could be an automated reminder or a good old-fashioned letter.
In the age of electronic communications, keep in mind that phone calls can also be very effective. A phone call is an opportunity for relationship managers to discuss other matters with their borrowers.
4. Enforce borrower reporting compliance
For the group of borrowers and guarantors who do not respond to formal reminders, the next step usually gets their attention — and fast.
Failure to provide the specified financial information is typically an event of default in your loan agreement. Rather than accelerating the debt or forcing a collection action, you have the right to institute the default interest rate.
Actual experience across many financial institutions has shown that this technique quickly draws the recalcitrant party’s attention and leads to the required information.
You will likely never collect any of the default interest, but that’s OK. You get the financials.
Some lenders are initially averse to this idea, out of concern that the client will be angry about the interest rate increase.
But remember, you are acting within the terms of the loan agreement, and complying with what you had already agreed to is all that’s required to make this problem go away.
And no need to worry that they will leave and go somewhere else for their credit needs — this technique is commonplace in the industry.
Collecting borrower financial statements requires institutional discipline. But the benefits to your institution are worth the effort.
FAQs
What financial statements should commercial borrowers provide?
Commercial borrowers typically provide a lender reporting package, including:
- Balance sheet, income statement (P&L) and cash flow statement.
- Year-end financial statements (compiled/reviewed/audited, as required) and business tax returns.
- As applicable: A/R and A/P aging reports (and borrowing base certificates); for CRE, rent roll and property operating statements.
How often should borrowers submit financial statements?
Most commercial borrowers submit interim financial statements monthly or quarterly, with annual financial statements and tax returns due after year-end (often within 90–120 days, depending on the loan agreement).
How do lenders track commercial loan documents?
A centralized tickler/tracking system (platform or spreadsheet) that logs required documents by borrower, due dates/receipt dates and past due status, with automated reminders and escalation.
How can lenders improve borrower compliance with reporting requirements?
Lenders can improve borrower compliance by setting clear financial reporting expectations upfront, using a document-tracking (tickler) system, sending pre-due reminders, and consistently enforcing loan agreement reporting requirements when documents are late or missing.
What happens if a borrower doesn’t provide financial statements?
If a borrower doesn’t provide required financial statements, it may be a reporting covenant breach or event of default — which can trigger default interest and other remedies under the loan agreement.
How Wipfli can help
Stay compliant as you serve borrowers without headaches or hassle. We can help you find the right people, processes and digital strategies to make the business of banking easier to manage — and more profitable Contact us today to learn more.
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