Commercial Loan Analysis
Principles and Techniques for Credit Analysts and Lenders by Ken Pirok
Commercial Loan Analysis

Electronic Version of Commercial Loan Analysis Available

I am sorry to announce that the hard copy version of Commercial Loan Analysis is currently sold out.  It has been much more popular than I ever anticipated, and I am contemplating another print run.  In the meantime, I do have electronic versions available.

Please email me or comment on this blog post, and I will provide further details about how you can obtain an electronic copy of the book.


Ken Pirok

Commercial Loan Analysis Book

Commercial Loan Analysis: Principles and Techniques for Credit Analysts and Lenders is a vital resource about the critical loan decision-making processes. Whether you need a quick answer or a full refresher course, the book includes all of the relevant formulas, worksheets, and guidelines you need to properly evaluate a loan.

You’ll go beyond the basics to get a thorough look at the quantitative and qualitative aspects of the loan analysis process. In addition to the numbers, you’ll also be exposed to the financial detective work that marks an exhaustive analysis. Designed for immediate, practical application, this manual supports both on-the-job training and real life analysis. This book is ideal for bankers of any degree of experience and institutions of any size. Commercial Loan Analysis takes a comprehensive look at a fundamental part of every lending operation.

Two of Ken Pirok's books, Commercial Loan Analysis and Managing Credit Department Functions are recommended reading for the Certified Lender Business Banker/CLBB designation. Make them part of your safe, sound, and strong lending practice.

You may order Ken Pirok's books at Amazon or

Financial Statement Analysis Course: Principles and Techniques for Credit Analysts, Commercial Lenders, and Loan Review Professionals

This full-day course provides lending professionals with a thorough discussion of both business and personal financial statements. The concept of cash flow is presented as the key factor in determining repayment ability. Participants learn to use information derived from specific formulas and ratios, and they learn to incorporate the Statement of Cash Flows into their analysis. They also discover how to go beyond the numbers to learn the root causes of fluctuations in financial statements. A case study is used for practical application throughout the course, and participants are asked to actively participate in the program. Here is the course outline and further information...<< MORE >>


Financial Statement School presents all kinds of information about financial ratios.  Just click to learn about liquidity, the current ratio, and the quick ratio.

Sources and Uses of Cash

Source of Funds:
Revenue or Income on the Income Statement
Decrease in Assets (such as receiving payment on an account)
Increase in Liabilities (such as taking out a loan)
Increase in Equity (such as a stockholder paying capital into the business)

Use of Funds:
Expense or Loss on the Income Statement
Increase in Assets (such as purchasing equipment)
Decrease in Liabilities (such as making a principal payment on a loan)
Decrease in Equity (such as paying a dividend)

Accounts Receivable Transactions

When you analyze accounts receivable, it is important to scrutinize the quality and creditworthiness of the debtors as well as whether they pay on time. But, it is just as important to look at the accuracy of the accounting transactions behind the balances.<< MORE >>

Accounts Payable Turnover Ratio

The accounts payable turnover ratio represents the average number of times per year (or per period) that payables "turn over" or are paid for with cash. A higher (more rapid) turnover is generally more favorable as payables are being paid more quickly. << MORE >>

Analyzing Business Plans

Does your bank require loan applicants to provide business plans?  Must every business have a business plan?  Here is an article entitled "Do You Need a Business Plan?"  Yes, even if the plan is informal, every business must be able to communicate a few essentials.

If you're analyzing business plans, check out for some more articles, including a sample business plan outline.

When do you add back rent to a debt service coverage ratio?

Very often, the building where a business operates is owned separately from the business, itself.  In many cases, the owner of the company will own the building personally or through a separate LLC and lease it to the business.


When performing a debt service coverage analysis, such rent paid to company-owners should usually be added back to cash available, and the debt service for the building should also be included as debt service for the company.  The cash flows of the company are effectively paying the debt service on the property, regardless of the paper trail, so, to perform a proper debt service coverage analysis, you include the debt service on the mortgage in the denominator.  At the same time, the rent is available to service this debt.  (Remember, if you include one of either rent in the numerator or mortgage debt service in the denominator, then you must include the other.)


Sometimes it is only appropriate to add back a portion of the total rent:


Example 1: If the total rent is comprised of rents for various properties, you will only add back the rent portion for the properties also owned by the owner of the company since only that portion is included as debt service.


Example 2: The owner may effectively be distributing income to himself from the company through excessive rent.  If the rent paid by the company is significantly more than the debt service for the given property, then it may be appropriate to add back only the amount of rent necessary for debt service for the property.


Example 3: If a portion of the rent includes cash expenses such as taxes or insurance, then the amounts of each of these expenses should not be added back.  Do not add back rent unless you obtain a financial statement or lease or verify that the rent added back does not include such expenses.


Note also that you should add back rent paid to owners and consider the corresponding debt service even if the loan is from a different bank.  You also add back rent when the company had been renting and is now buying a facility.

Financial Statement Spreading Programs

I am interested in learning what programs lenders and analysts are using these days to spread financial statements.  Which one are you using?  Do you like it?  Would you like to provide a review, or would you read reviews by others?

Here are a few examples of programs from my memory and from a brief Google search:

Baker Hill Statement Analyzer:

Moody's KMV RiskAnalyst:

Tyler Analytics Corporation:

Peldec Decision Systems


A guarantee occurs when a third party agrees to repay some debt if the borrower defaults. Company-owners are usually required by the bank to "personally guarantee" repayment of loans made to the company. The personal guarantee is important because it provides an extra method of repayment in case of default. The guarantee also helps keep the owner from being able to transfer funds to himself or herself, personally, to avoid repaying the bank. It also provides an important psychological advantage as well. If the business-owner stands to lose money or assets, personally, then he or she is more likely to work to make sure that the company pays its debts.

Related corporations frequently guarantee loans made to their owners or to other companies as well. Guarantees can be:

1. Unsecured or Secured: A secured guarantee occurs when the guarantor pledges some personal asset as collateral along with his or her guarantee. Asset pledges by guarantors frequently include residential mortgages, mortgages on company operating facilities, or stock in the borrowing company.

2. Unconditional or Conditional: A conditional guarantee follows some pre-specified condition such as the requirement that collateral must be liquidated before a guarantee can be enforced.

3. Unlimited or Limited: A limited guarantee could, for example, limit a guarantor's personal liability to his pro rata share of ownership of the company or to a certain dollar amount.

Fraud: Understating Accounts Payable

Receiving internally generated statements from a client is bad enough, but cash basis statements may add additional problems, inaccuracies, and outright fraud.

I once worked with a commercial borrower who was providing the bank with cash basis statements. The statements showed that the company was basically breaking even, but this was far from reality. Because the statements were cash basis, the borrower was only recognizing expenses as they were actually paid. The reality was that a bunch of unpaid bills were accumulating. By the time we found out about them, it was too late. The company declared bankruptcy shortly thereafter.

How can you avoid such a problem? Require an audit. Check with the IRS to determine that all liabilities are paid up. Make sure that any defaults on other loans, leases, insurance policies, etc. trigger some communication with your bank.

Have you had a similar case? What did you do about it?
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