What credit analysts look for

What credit analysts look for

Credit analysis is a vital part of the approval process for corporate borrowers. Credit analysts look for data that proves how worthy an organisation is of credit when it applies for finance. It essentially evaluates financial strength. Before an investor puts any money into an organisation or a financial institution lends money to it, it will ensure that it conducts a credit analysis. 

Part of this process will focus on qualitative aspects, while another part will examine quantitative factors. 

Credit analysts will essentially be looking for factors that will prove that the applicant is reliable, trustworthy and profitable.  

The 5Cs of credit are often heavily relied upon, in addition to the use of ratios. The former involves using a checklist to evaluate an organisation that is applying for finance. 

Having Collateral is a great way of providing assurance. It’s a Plan B, in case things don’t work out. These assets will be sold to recoup the costs incurred. 

Capital examines how much the owner has invested into the organisation. The more capital invested, the better the appraisal. 

Credit analysts look for the right type of conditions within the industry that a business is operating in. How will industry trends affect operations? Does it have competitive advantage? Will it thrive through harsh economic conditions or will it fail? 

Character is a major factor in the process. It’s a question of ethics, trustworthiness and reliability. Analysts will question other creditors, customers and suppliers. 

Capacity is examined by exploring past and future projections of cash flows. It usually involves looking back at the past three to five years of financial statements and analyses the ability to service debt.

Categories: Financial tips