credit analysis 101
DESCRIPTION
Commercial credit analysis can introduce a lot of complexities into the banking organization: additional underwriting standards, new financial data to collect and interpret, complex relationships with multiple entities and commingled incomes, additional regulatory focus, etc. Sageworks Senior Consultant Peter Brown covers some of the basics that come with credit analysis including what data to consider, how to analyze the data, when to introduce benchmarking and automation and other topics.TRANSCRIPT
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Credit Analysis 101
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Poll: What is your role at
the institution?
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Poll: What is your
experience level with
credit analysis?
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Our Presenter
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Peter is a Senior Consultant for Sageworks, where he
provides risk-management advisory services to
Sageworks’ bank and credit union clients. He brings
experience in technology, business and financial
services into his role. Peter successfully navigated
the challenges of running a small business in a
competitive marketplace.
Peter Brown
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Background
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Sageworks
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Agenda
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Key Fundamentals for Successful Loan Packages
• Qualification
• Quantification
• Presentation
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Introduction
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Financial Institution Perspective
Who is Borrowing the Money: Step 1. Customer Profile
Can They Pay Us: Step 2. Financial Data
Are We Protected: Step. 3 Collateral
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The 5 C’s of Credit
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The 5 C’s of Credit
Character
—personal integrity of business owners
and officers
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The 5 C’s of Credit
Capacity
—can the borrower generate adequate cash
to repay the loan
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The 5 C’s of Credit
Capital
—is the borrower adequately capitalized
within industry standards to withstand
unexpected loss
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The 5 C’s of Credit
Collateral
—is there an alternative source of
repayment in case the primary source
fails
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The 5 C’s of Credit
Conditions
—the economic, industry, and market
environment can and will change. Is the
borrower flexible enough to adapt
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The 5 C’s of Credit
• So what?
• Analyze
• Present
• Get approval
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Qualification
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Who are our customers?
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Big Dreams
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Difficulty Executing
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What’s the problem?
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1. Lack of experience
2. Insufficient capital (money) 3. Poor location
4. Poor inventory management
5. Over-investment in fixed assets
6. Poor credit arrangements 7. Personal use of business funds
8. Unexpected growth
Financing-related Difficulties
Source: Michael Ames Small Business Management
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Why do they need a loan?
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Phase of Business Cycle
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• Purchase Real Estate
• Purchase Equipment
• Purchase Inventory
• Increase Working Capital
Specific Needs
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How to match needs with
loan types?
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Type of Loan Available
• SBA loan
• Credit Card
• Line of Credit
• Short-term Loan
• Longer-term Loan
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Qualification Summary
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Matching the Right Loan
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Quantification
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Poll: How are you
currently quantifying your
credit analysis?
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Financial Statements
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Financial Statements
A financial statement
is…
…a standard way to
measure and track
performance
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Financial Statements
Income Statement
Measure of performance over a
defined time
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Financial Statements
Balance Sheet
Measure of performance at one point
in time
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Financial Statements
Cash Flow
Measure changes in balance sheet
and income affecting cash position
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Key Metrics
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Current Ratio
…a measure of whether or not a
business has enough resources
to pay its short-term debts over
the next 12 months
A Current Ratio is…
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Working Capital
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EBITDA
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Debt Service Coverage Ratio
Approx 1.2 Minimum
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Industry Comparison
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Industry Comparison
• How are they doing compared to their peers
• Now
• Historically
• Key Metrics
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Industry Comparison
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Industry Comparison
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Quantification Summary
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Quantification
• Financial Statements
• Key Metrics
• Industry Comparison
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Presentation
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Typical Processes
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Loan Package
• Multiple formats
• Copy and paste
• Abundance of information
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Successful Presentation
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Loan Package
• Why – Telling the story
• What – Key Highlights
Less is more
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Process
• Fully Analyze
• Synthesize
• Make Concise
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Demonstration
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Success!
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Summary
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Success!
• Qualify
• Quantify
• Present
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Are you interested in
learning more about
Sageworks Credit
Analysis?
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Questions