Question

In: Finance

A local machine shop is requesting a $50,000 5 year term loan to purchase a piece...

A local machine shop is requesting a $50,000 5 year term loan to purchase a piece of equipment for its operation. What financial information would you, as the credit analyst, require the commercial loan officer to obtain from the business in order for you to analyze the request?

Solutions

Expert Solution

The five C's, or characteristics of credit, which are:

1.) Character: An opinion of a borrower’s general trustworthiness, credibility and personality. Assessed from credit history, reputation and interaction with borrowers.

2.) Capacity: Ability to repay the Loan. Assessed from financial metrics and benchmarks,credit score

3.) Capital: Amount of money/ capital invested by business owner or management team in the business. It shows you have some skin in the game.

4.) Conditions: The condition of business, that is, whether it is growing or faltering. It also considers the use of those funds, the state of the economy and the industry in which the company operates and how these factors might affect your ability to repay the loan. It is assessed from Economy, Industry and Company analysis.

5.) and Collateral: Assets that are used to guarantee or secure a loan. It is used as a backup if borrower can not pay back the loan. It is assessed from assets such as real estate and equipment; working capital, such as accounts receivable and inventory; and a borrower’s house which can be used as a collateral.

These are a framework used by many traditional lenders or Loan officers to analyze the loan request.

An analysis of these five factors allows banks and lenders/ Loan officers to determine if you are a reliable borrower.


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