Credit Analysis
Credit analysis is used by the lender to ascertain the risk linked to the loan proposal. Whether you are looking for funding from any FDI (Financial Development Institution) or from any other organization, your request will be decided as per your Credit Worthiness assessment by your potential lender. Apart from the detailed documentation of the business etc lender mainly look for few basic yard sticks during the credit analysis and they carry much more importance than the entire process.
5 Cs of the Credit
Character
Capacity
Capital
Condition
Collateral
1. Character
Organizations want to lend to people who are responsible and carries good values in general in the society. It is subjective assessment of the prospective lender towards the applicant’s trust worthiness and credibility. Lender will derive this from applicant’s educational back ground, business experience and from the market checks of the reference provided by yourself and with any further checks they might want to do.
2. Capacity
Prospective lender will want to know whether applicant has the capacity to repay the cash. Therefore, they will observe the cash flow generation of the business. If the business is generating handsome cash flows from its operations, lenders will surely give thumb up to the fund application. Since the smooth cash flows of the business will not only guard the business performance but also lender’s interest and repayment of the loan.
3. Capital
Lender will look for the amount of money applicants has invested in the business in order to ensure that applicant has his interest in the business. Lenders will expect that applicant has adequately invested in the business but its ratio will be different for every different lender. There once someone is applying for the fund application, they must keep this in mind.
4. Condition
Lender will review the condition of the business before extension of any funds to the borrower. Because lender will not be going to extend any funds to the business not doing good. Further, lender will assess the condition in the industry and also the political conditions of the country. If the lender finds any adversity in the conditions of the business or industry etc the approval of the funds will be difficult.
5. Collateral
Lender will secure their funds by way of securing collateral in their favor. It can be in shape of mortgage of house or any guarantees etc. It is used to be the backup of the lender that in case applicant could not pay the funds back they will liquidate the collateral and recover their funds.