The Basics of Credit Analysis and Types of Risks
Credit analysis is used by lenders to enable them to get an accurate profile of a subject. It’s a guide to whether or not a company will repay the loan if it has been given access to finance.
Lorna is applying for credit, but she presents a number of risks to lenders. She needs to know what red flags are in terms of credit applications, so she knows what she needs to fix.
She needs to know that the process looks at everything that could affect loan repayment. Her previous payments will be looked at thoroughly, along with how much debt she has had and still has.
Her ability to pay the loan off is a key factor.
Overhauls of approaches to risks involved have been as a result of more stringent regulatory requirements.
This is why the 5 Cs of credit have become more important. Lorna should familiarise herself with them in order to gain the upper hand with lenders. They offer an easy way to gauge the level of risk.
Risks involved include:
If a business presents this type of risk, it means that the money raised through equity may be insufficient to cover operating costs.
Lorna must know that the risk she presents is based on the likelihood of default she presents.
Credit analysis is there to ensure the likelihood of this occurring is measured by assessing the previous payments. A good expert ensures that they look at both qualitative as well as quantitative factors when it comes to deciding on if an organisation or individual should get finance or not. It can be lengthy. Going through the reports and doing background checks is part of it all.
Lorna needs to know that credit providers are just looking to protect their interests, which is why they have to be strict about assessing risk.