Credit Analysis Basics – Managing the Company's Credit Function

Banker Resource
June 20, 2013 — 1,614 views  
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Credit analysis is one of the lifelines of any lending organization. As a result, being able to make the right decisions on whom to lend to is equally important and organizations that make the wrong decisions on a continuous basis will find themselves bankrupt very soon. Credit analysis basics always start with the ‘credit worthiness’ of an individual – his or her ability to keep up to the payment structure of a loan without defaulting. Credit histories are becoming more and more essential as a result. Over the years, a large number of analysis techniques have been developed in order to check an individual’s credit-worthiness.

The Five C’s of Credit Analysis

Experts state that the root of credit analysis – worthiness starts with the implementation of the 5 C’s. The 5 C’s comprise of – Capacity, Capital, Collateral, Conditions, and Character.

The first one, Capacity, pertains to what is considered the most essential aspect of all five – cash. It is about understanding a borrower’s ability to repay a loan through aspects such as income from the business and profit margins. Capital, the second piece of information that is essential to lending, pertains to the amount of money that the individual has already invested into the business on its own. It determines how much at risk he or she is, should the business fail.

Collateral is the aspect of credit function that looks at a prospective borrower’s ability to put down collateral in terms of assets, in the unfortunate event that the loan cannot be repaid. Conditions are a description of the intended use of the loan, while the ‘Character’ is the general impression that the financial organization has of an individual approaching them for the loan. Trustworthiness of the individual is determined in this stage of credit analysis and credit function.

Managing the Company’s Credit Functions

Managing credit function of a financial organization is no easy task. The fact that you need to vet as many borrowers as possible, and gauge the benefit that lending them money would have to the bank is an essential component of ensuring that your business stays profitable. A poor credit analyst team will see the business give in to a lot of problem loans or bad debts. Being able to analyze the risk by looking at a borrower’s capacity, capital, collateral, conditions, and character will go a long way into helping you make the right decisions. Using some of the more advanced and newer methods of credit analysis such as ratio and trend analysis, credit history, and management ability will provide you with all the information and data you need to ensure that any gut instincts are also powered by information.

Managing a company’s credit functions will require years of knowledge and experience. Although there are emotions attached to almost any borrowing or lending – it is important to remember that any decisions made should always be in the interest of the business you represent. Avoid getting drawn into emotionally charged situations and always consult those people that have an emotionally unobstructed view of the situation.

In conclusion, credit analysis and credit function management is a vital aspect of a financial organization’s existence. A credit analyst always needs to think on behalf of the business while also ensuring that a borrower’s ability to pay back the debt and run a successful business with a climbing profit margin make him or her a trustworthy individual to do business with. 

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