STEPS OF CARRYING OUT CREDIT ANALYSISPosted by: On February 22, 2018
Credit analysis is conducted on a credit applicant to establish the ability of the customer to honor their obligation when it falls due. The credit worthiness of the customer can be established by analyzing the financials, credit history and by obtaining the credit report of a customer from a CRB. Credit analysis is, therefore, the prediction of a borrower’s ability to repay based on the information provided by the borrower and other sources.
Three Steps to a successful credit analysis are;
Information collection stage; this involves the collection of all information regarding the customers, bank statements, credit application forms, credit report, financial reports, identification documentation, business licenses and other certificates etc.
Information analysis stage; Based on the information collected at stage one; the credit officer should analyze all the documents to identify the customer positively, establish the ability to repay the loan by the customer, productivity of the project to be financed and liquidity of the customer. At this stage, the customer credit score may be established.
Decision-making stage; the decision to lend or not to lend must be based on facts which will heavily rely on stage one and two. It is at this stage the creditworthiness of the customer is established based on the 7C’s of credit which are;
Character; the character of the individual will be based on information provided and verified from other sources like the CRB. The integrity of a customer is very important even in lending. The past history must be good and the reputation of the borrower is beyond reproach.
Capacity; Ability to generate cash to repay the debt must be established. Lending must be based on existing cash inflow and not what the project is funded will generate. Most defaults are as a result of lending to a borrower who has no means to generate cash to service the facility offered.
Capital contribution; no institution should offer 100% funding for a project unless they are so sure of repayment. A borrower should be in a position to show his capital contribution to the project. If the funding is towards a business, the owner must show their stake in the business. Solvency of the business must be established.
Collateral; a fall back for non-payment must be in place to ensure that the risk is minimal. A guarantor may be obtained to secure the credit facility in the event the primary borrower is unable to service the loan.
Conditions; every facility has a unique condition on how and when payment should be made. The borrower must show the ability to make repayments required to settle the account within the specified period. Most borrowers are unable to make total repayments required in full.
Cash flow; borrower must have the ability to generate cash to honor the obligation. The project should be cash generating and if not there should be other known and established sources of cash.
Commitment; the borrower must be committed to the business to ensure the business is running well to protect the interest of the lender, running of the business must be done professionally.