Business credit analysis examines financial statements, cash flow, company history, and trends to determine eligibility for credit. Past, present, and projected future are analyzed to predict the company’s future health. Ethics, loan purpose, and collateral are also considered.
A business credit analysis is the process of determining whether an organization is eligible for credit. This is typically accomplished through an examination of company financial statements. Other factors such as financial reports, company history and general trends will also often be considered. Cash flow is also an important element of the analysis. The overall objective is to determine whether the asset is and is likely to continue to be able to repay a loan or, in some cases, service its obligations.
When performing a business credit analysis, it is common to look at the company’s past, present, and projected future. Past records can demonstrate how the company handles finances, outside influences, and any other factors that may affect cash flow. An accurate picture of the current state of the business can give an analyst insight into day-to-day management techniques and how they affect the well-being of the organization. Understanding the past and present will usually give the analyst the tools needed to make predictions about the future health of the company.
A comprehensive trade credit analysis will outline the overall finance cycle that is expected of the company. It will also demonstrate an understanding of the company’s strengths and weaknesses and what they mean. An in-depth analysis will also include information about how the company handles debt, as well as how much it is likely to be able to handle. It can also include a worst-case scenario if the business falls on hard times.
A good trade credit analysis will look beyond current trends in favor of the bigger picture. For example, a company may currently be experiencing rapid growth, but that doesn’t necessarily mean it’s a good candidate for a loan or bond issue. Such growth will generally be scrutinized. The analyst will determine if this is a temporary push based on a fleeting external factor or if it is the result of the company’s awareness of a market that needs long-term services. There will also likely be an analysis of past growth to see if it was stable and forecasts to determine if growth will continue to be stable in the future.
Some other factors an analyst may consider are the general ethics of the company, what the money is for in the case of a loan, and what collateral is available. The first factor establishes intent and determines whether the company has the integrity to follow for financial obligations. It is also important to analyze what the loan will be used for in order to determine whether or not it will be successful in enabling the company to repay the borrowed money. The analyst should also determine whether the collateral offered is sufficient to cover financial liabilities.
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