Credit analysis is a process used by lenders that provides insight into the financial behaviour of credit applicants. The results make it easy to work out the level of risk that this applicant presents.
Jennifer is a consumer that wants to apply for a loan. She needs to be informed about the process, which is used by financial experts, utilising various techniques.
The findings of a credit analysis report provide clarity on her financial status, assisting lenders with making informed decisions before they approve any loans.
Some of the techniques used involve using ratios. Credit analysts assess various elements of financial standing
Credit analysis involves looking at Jennifer’s use for the loan, and also whether the loan really is needed.
The experts will project Jennifer’s cash flow, while evaluating how much collateral she has, by using financial statements.
Jennifer must be able to provide some form of surety, to cover payment in case she is no longer able to. These experts are responsible for ensuring that the surety sources are legitimate.
Part of the assessment of credit includes extensive use of the 5 Cs of credit. By looking at Jennifer’s character, this means gathering general impressions of her financial behaviour.
The credit provider will also look at whether she has enough money to repay the lender, in other words- her capacity.
If Jennifer was a business owner, seeking finance, the amount of money she has invested into the business already will also be considered.
Collateral has a lot of weight in the process of seeking finance, so Jennifer must be able to prove that she has legitimate sources of surety.
The reasons for needing the loan are also key factors. Before Jennifer is granted credit, she has to remember that current economic conditions will be considered.
At the end of the process, credit analysts submit a report summarising details such as, why the applicant needs the loan and the borrower’s comparative financial performance with industry standards. They then make recommendations based on all of the information that has been presented and discovered. Lenders are then able to make their own decisions based on these recommendations, which are regarded as expert advice.