The lending process is associated with the actions of numerous and varied risk factors that can lead to non-repayment of a loan on time. Therefore, the bank determines the provision of loans by studying the creditworthiness, i.e. studying the factors that may entail their non-repayment. Business credit shows financial strength and allows it to be assigned to the appropriate classes during rating.
Assessment of creditworthiness involves, first of all, the use of indicators characterizing the activities of the borrower in terms of the possibilities of repayment of outstanding loans.
The creditworthiness of an enterprise is characterised by its accuracy in making payments on previously received loans, its current financial condition and prospects for change, and the ability, if necessary, to mobilise funds from various sources.
Availability of assets that can be sold to pay off debt
(loans from other banks, loans, issue of debt securities, issue of shares)
A system of financial ratios, analysis of cash flow, business risk and management are used as methods for assessing creditworthiness.
Thus, the creditworthiness of the borrower is based on a number of factors, each of which, from a certain point of view, characterises the company in the eyes of the bank and helps to understand how great the possibility of not repaying the loan is. Moreover, a set of these factors is optional. Each bank independently forms it in accordance with its credit policy. Therefore, the best solution for your company may be to take business secured loans.
– secure pledge;
– regional risks (risks of investing in the region where the enterprise is located);
– credit history of the enterprise;
– subjective factors of creditworthiness.
The collateral is necessary to repay the loan and interest on it at the expense of it if it is impossible to repay the borrower’s funds. The sale of property should be carried out in bulk in a short time and at prices favourable to the Bank so that the proceeds fully cover the amount of the principal debt and the interest accrued on it. For this, when concluding a loan agreement, the relevant specialists of the Bank must assess the market value of the property pledged as collateral, its liquidity and the borrower’s rights to this property. However, the organisation of such a service by a bank in its state is expensive, so it would be advisable for banks to order periodic reviews of the market of basic goods accepted as collateral from property appraisers and, on the basis of this, draw a conclusion about the advisability of accepting any property as collateral.
Regional risks are associated with the fact that lending to enterprises located outside the area of operation of the bank or its branch, as well as located in the so-called “risk regions” is obviously more risky than in prosperous regions and in the work area of the Bank. Political instability in the region, extreme weather conditions, interruptions in the supply of electricity, water supply and sanitation, disagreements between federal and local legislation, the level of unemployment, the dynamics of wage arrears to budgetary organisations and all kinds of benefits also contribute to the increased risk. The attractiveness of the region is added by a favourable investment climate, protection of invested funds at the government level, a well-functioning judicial system, the availability of minerals, and highly qualified personnel. The above positive and negative aspects of the development of the region should respectively add or subtract a certain number of points when assessing the creditworthiness of the borrower.
The credit history shows how the borrower previously paid off the loans and borrowings received, whether there were delays in the payment of principal and interest. It is obvious that if, throughout its existence, the enterprise has regularly paid all its obligations, then the likelihood that, other things being equal, in the future the enterprise will also pay off the existing obligations without delays. If the credit history is not flawless, then it is necessary to find out what were the reasons for the delay in payment. In the case of objective reasons and a short period of delay (up to 5 days), then such a delay can be neglected. However, if the delay was longer and was caused by subjective reasons, then this fact should alert the lender, and in the presence of outstanding overdue loans, the borrower must be refused to receive a new one.
We hope we have helped you look at all the factors that can affect your business credit. After analysing all the factors that can affect your creditworthiness, consider what type of loan suits your business and how you can improve your business credit.
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