Question

In: Finance

As a commercial banker with a major bank, a client company approaches you and asks for...

As a commercial banker with a major bank, a client company approaches you and asks for an increase in the ABL credit line to cover a cash shortfall the company calls temporary. What would you look at to determine whether you should recommend an increase in their credit line to the lending committee?

Solutions

Expert Solution

While extending the credit line of an existing customer, the following points should be looked at, in order to determine the viability of said extension:-

1. Credit Score- First and foremost, the credit score and history of re-payments is required to be checked in order to determine if the client is trustworthy enough for us to extend credit.

2. Income statements - Income statements of past years and projected statements of future years can help lender identify the eligible amount upto which the company can bear to pay back. After all, bank doesn't want to get involved in credits where risk is at large.

3. Timing of cash shortfall - Since client is asking credit to cover a temporary cash shortfall, lender should determine whether the cash shortfall is actually temporary and if client is expected to have cash inflows in near future. This can help determine the viability of extension of such credit line

4. Relationship with the client - For a client based business, the most important asset is to maintain long term relationships for clients and sometimes, business has to suffer a bit of an extra risk in order to save that relationship. This is also an important factor to keep in mind while accepting / rejecting client's request.

While there are a lot of factors to be looked at, before extending a credit line, the credit limit is not something that is set in stone. It may depend upon a lot of non-financial factors which differ from client to client.


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