Businesses undertake a credit analysis to determine their ability to meet their financial obligations. It involves analyzing audited bank statements for a company. The primary goal of embarking on this process is to assess the risks that can get borne in the case of a default. It also entails analyzing the value of the security that the company owns. It gives lenders a cushion for any unexpected losses that may result from failure to honor repayments.
How to evaluate a company’s credit profile
It can get achieved by dividing the worth of assets by the value of liabilities. One should check out for a ratio of two or above. This ratio implies that the company is servicing its debts efficiently without any defaults. A lower ratio is a danger sign to the survival of the enterprise. It means that the firm is currently handling higher debts than it can manage.
· Check the bank statements
Lenders usually check the financial statements before issuing new loans. They look for the net earnings which should surpass the expected monthly payments. The financials which are commonly analyzed include the balance sheet and the profit and loss statement.
· Consider the length of servicing a loan facility
Existing loans that have a longer repayment period tend to be less attractive to new lenders. It is because of the risk factors involved due to the inability to determine the strength of the business in the future. Consequently, banks will opt to charge greater interest rates to cushion themselves from risks of non-repayment. Financial institutions will favor companies that have a clean record of monthly installments. You want to be sure to recognize how long do hard inquiries stay on your credit during this point.
How the credit profile affects the overall value of the company
Companies with a higher credit rating are better placed when it comes to accessing loans from lenders. It can help them meet their day to day activities since they are liquid. Creditors can be paid on time ensuring a smooth flow of business functions. Acquiring funds can also enable them to expand into other areas of operations hence reaching more customers. It gives them an edge to compete with rivals in the market. Partnering with other businesses becomes easier since new stakeholders feel at ease when it comes to availing of funds.
Credit analysis is a tasking but unavoidable process in any line of business. It aims mostly at availing crucial information needed by financial institutions that may consider lending to any enterprise. Getting accurate data is essential since it helps lenders avoid lending to risky businesses.