The crash of 2008 made it clear that some lending institutions were not making good loans. Even banks that weren’t hit hard by the financial crisis felt they had a responsibility to their clients to handle the loan process with more care. Factors other than credit rating are now to be given a great deal of weight in the lending application process.
What Is CECL?
The Financial Accounting Standards Board created the Current Expected Credit Loss (CECL) model to provide modeling options to lenders when forecasting the viability of a loan. In addition to loan valuation measures, lenders can review the stated purpose of the loan, how the borrower will use the loaned funds to increase cash flow and the risk of default to the lender. If you’re going to use a business loan to enable you to add a new manufacturing process or hire a CFO, you’re upgrading the environment of your facility and likely adding to your ability to pay the debt. CECL is subject to a variety of environmental factors, which can make the process of estimating loss potential quite a chore.
As credit cards are unsecured loans, CECL regulations will put more stress on credit card issuers to maintain a bigger reserve. Their reserve, or ready stash of cash, will protect the credit card lender in the event of another financial crisis. Due to the CECL regulations, great growth in credit card use could greatly increase the reserve requirements. However, credit card use is expected to flatten over the next several months. As long as borrowers keep their credit card use low, the reserve requirements will also stay low.
Borrow With a Purpose
If you need to get a loan to expand a product line, increase your business capacity or hire a key team member, you’ve passed the environmental test. While building a business plan as part of a loan request can be daunting, your lender has some flexibility to help you secure a loan, even if your credit rating has challenges.
CECL restrictions can look daunting. However, they might actually help you out if you can cash in on the environmental variables that are now allowed to be taken into consideration. When you’re updating your business plan or putting together your balance sheet, be ready to show where your loan dollars will go. Demonstrate how that investment in the business will increase your market share and income.
Be secure in your financial future by getting started on your investment planning!