Credit Analysis Presentation

7/28/2019 Credit Analysis Presentation

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PRESENTED BY:PRIYA KHICHIJYOTI RANA


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Credit analysis is the method by which onecalculates the creditworthiness of a business ororganization. The audited financial statements of alarge company might be analyzed when it issues orhas issued bonds. Or, a bank may analyze thefinancial statements of a small business beforemaking or renewing a commercial loan. The termrefers to either case, whether the business is largeor small.
http://en.wikipedia.org/wiki/Creditworthinesshttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Creditworthiness


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http://en.wikipedia.org/wiki/Collateral_(finance)http://en.wikipedia.org/wiki/Ratiohttp://en.wikipedia.org/wiki/Collateral_(finance)http://en.wikipedia.org/wiki/Ratio


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CASH FLOW COLLATERAL

CAPITAL

CHARACTER CONDITIONS
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Cash Flow- is the first "C" of the 5 C's of Credit (5

C's of Banking). Your banker needs to be certainthat your business generates enough cash flow torepay the loan that you are requesting. In order

to determine this the banker will be looking atyour companys historical and projected cashflow and compare that to the companysprojected debt service requirements. There are avariety of credit analysis metrics used by bankers

to evaluate this, but a commonly usedmethodology is the Debt Service Coverage Ratio.
http://www.wikicfo.com/Wiki/Cash%20Flow%20After%20Tax.ashxhttp://www.wikicfo.com/Wiki/Cash%20Flow%20After%20Tax.ashxhttp://www.wikicfo.com/Wiki/Cash%20Flow%20After%20Tax.ashx


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In most cases, the bank wants the loan amountto be exceeded by the amount of the companyscollateral. The reason the bank is interested incollateral is as a secondary source of repayment

of the loan. If the company is unable to generatesufficient cash flow to repay the loan at somepoint in the future, the bank wants to becomfortable that it will be able to recover its loan

by liquidating the collateral and using theproceeds to pay off the loan.


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When it comes to capital, the bank is essentially looking for the owner ofthe company to have sufficient equity in the company. Capital isimportant to the bank for two reasons. First, having sufficient equity inthe company provides a cushion to withstand a blip in the companysability to generate cash flow. For example, if the company were tobecome unprofitable for any reason, it would begin to burn throughcash to fund operations. The bank is never interested in lending moneyto fund a companys losses, so they want to be sure that there is enough

equity in the company to weather a storm and to rehabilitate itself.Without sufficient capital, the company could run out of cash and beforced to file for bankruptcy protection.

Secondly, when it comes to capital, the bank is looking for the owner tohave sufficient skin in the game. The bank wants the owner to besufficiently invested in the company such that if things were to gowrong, the owner would be motivated to stick by the company and workwith the bank during a turnaround. If the owner were to simply handover the keys to the business, it would clearly leave the bank fewer (andless viable) options on how to obtain repayment of the loan.


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Another key factor in the five C's of credit is the overallenvironment that the company is operating in. The banker isgoing to assess the conditions surrounding your company and itsindustry to determine the key risks facing your company, andalso, whether or not these risks are sufficiently mitigated. Even ifthe companys historical financial performance is strong, the

bank wants to be sure of the future viability of the company. Thebank wont make a loan to you today if it looks like the viabilityof your company is threatened by some unmitigated risk that isnot sufficiently addressed. In this assessment, the banker isgoing to look to things such as the following:

The competitive landscape of your company - who is yourcompetition? How do you differentiateyourself from the competition? How does the access to capital ofyour company compare to the competition and how are any risksposed by this mitigated? Are there technological risks posed byyour competition? Are you in a commodity business? If so, whatmitigates the risk of your customers going to your competition?


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Character While we have left Character for last, it is by no means the least

important of the 5 Cs of Credit or Banking. Arguably it is themost important. Character gets to the issue of people are theowner and management of the company honorable people whenit comes to meeting their obligations? Without scoring high

marks for character, the banker will not approve your loan.

How does a banker assess character? After all, it is an intangible.It is partly fact-based and partly gut feeling. The fact-basedassessment involves a review of credit reports on the company,and in the case of smaller companies, the personal credit reportof the owner as well. The bank will also communicate with your

current and former bankers to determine how you have handledyour banking arrangements in the past. The bank may alsocommunicate with your customers and vendors to assess howyou have dealt with these business partners in the past. The softside of character assessment will be determined by how you dealwith the banker during the application process and theirresultant gut feeling.


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To summarize, the 5 Cs of credit forms the basis of your bankersanalysis as they are considering your request for a loan. The bankerneeds to be sure that (1) your company generates enough CASH FLOW toservice the requested debt, (2) there is sufficient COLLATERAL to coverthe amount of the loan as a secondary source of repayment should thecompany fail, (3) there is enough CAPITAL in the company to weather astorm and to ensure the owners commitment to the company, (4)the CONDITIONS surrounding your business do not pose any significantunmitigated risks, and (5) the owners and management of the companyare of sound CHARACTER, people that can be trusted to honor theircommitments in good times and bad.

Hopefully this article has succeeded in helping you understand whereyour banker is coming from. With a better understanding of how yourbanker is going to view and assess your companys creditworthiness,you will be better prepared to deliver information and position yourcompany to obtain the loan that it needs to grow and thrive. You shoulduse these 5 C's as a credit managment tool to run your company


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The nature of your customer relationships are thereany significant customer concentrations (do any of yourcustomers represent more than 10% of the companysrevenues?) If so, how does the company protect thesecustomer relationships? What is the company doing todiversify its revenue base? What is the longevity of

customer relationships? Are any major customers subjectto financial duress? Is the company sufficiently capitalizedto withstand a sizable write-down if they cant collect theirreceivable to a bankrupt customer?

Supply risks is the company subject to supplydisruptions from a key supplier? How is this riskmitigated? What is the nature of relationships with keysuppliers?


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Credit Analysis Presentation

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