This lesson examines the technical aspects of loan structuring, the legal documentation required, and the pricing of loans.

6.1 Loan Structuring

Loan structuring involves designing a loan that meets the borrower’s needs while protecting the bank’s interests. Key considerations include :

  • Loan Amount and Purpose: Determining the appropriate loan amount and its intended use.

  • Repayment Schedule: Establishing a repayment schedule aligned with the borrower’s cash flow.

  • Collateral: Identifying and perfecting security interests in assets.

  • Covenants: Imposing conditions on the borrower to manage risk.

  • Maturity: Setting an appropriate maturity date.

6.2 Loan Documentation

Proper documentation is essential for legal enforceability and managing credit risk . Key documents include:

  • Loan Agreement: The master contract outlining terms and conditions.

  • Promissory Note: The formal promise to repay the debt.

  • Security Documents: Creating a legal claim on collateral.

  • Guarantees: Third-party promises to repay if the borrower defaults.

6.3 Loan Pricing and Negotiation

Loan pricing determines the interest rate and fees charged to the borrower. The Lincoln University syllabus dedicates a specific session to “Loan Pricing and Negotiation” . Key pricing considerations include :

  • Cost of Funds: The bank’s cost to acquire the funds it will lend.

  • Risk Premium: An addition to compensate for credit risk.

  • Profit Margin: The bank’s target return.

  • Market Competition: Pricing relative to competitors.

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