Credit Analysis 101
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Transcript of Credit Analysis 101
Credit Analysis 101
Poll: What is your role at
the institution?
Poll: What is your
experience level with
credit analysis?
Our Presenter
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
Background
Sageworks
Agenda
Key Fundamentals for Successful Loan Packages
• Qualification
• Quantification
• Presentation
Introduction
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
The 5 C’s of Credit
The 5 C’s of Credit
Character
—personal integrity of business owners
and officers
The 5 C’s of Credit
Capacity
—can the borrower generate adequate cash
to repay the loan
The 5 C’s of Credit
Capital
—is the borrower adequately capitalized
within industry standards to withstand
unexpected loss
The 5 C’s of Credit
Collateral
—is there an alternative source of
repayment in case the primary source
fails
The 5 C’s of Credit
Conditions
—the economic, industry, and market
environment can and will change. Is the
borrower flexible enough to adapt
The 5 C’s of Credit
• So what?
• Analyze
• Present
• Get approval
Qualification
Who are our customers?
Big Dreams
Difficulty Executing
What’s the problem?
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
Why do they need a loan?
Phase of Business Cycle
• Purchase Real Estate
• Purchase Equipment
• Purchase Inventory
• Increase Working Capital
Specific Needs
How to match needs with
loan types?
Type of Loan Available
• SBA loan
• Credit Card
• Line of Credit
• Short-term Loan
• Longer-term Loan
Qualification Summary
Matching the Right Loan
Quantification
Poll: How are you
currently quantifying your
credit analysis?
Financial Statements
Financial Statements
A financial statement
is…
…a standard way to
measure and track
performance
Financial Statements
Income Statement
Measure of performance over a
defined time
Financial Statements
Balance Sheet
Measure of performance at one point
in time
Financial Statements
Cash Flow
Measure changes in balance sheet
and income affecting cash position
Key Metrics
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…
Working Capital
EBITDA
Debt Service Coverage Ratio
Approx 1.2 Minimum
Industry Comparison
Industry Comparison
• How are they doing compared to their peers
• Now
• Historically
• Key Metrics
Industry Comparison
Industry Comparison
Quantification Summary
Quantification
• Financial Statements
• Key Metrics
• Industry Comparison
Presentation
Typical Processes
Loan Package
• Multiple formats
• Copy and paste
• Abundance of information
Successful Presentation
Loan Package
• Why – Telling the story
• What – Key Highlights
Less is more
Process
• Fully Analyze
• Synthesize
• Make Concise
Demonstration
Success!
Summary
Success!
• Qualify
• Quantify
• Present
Are you interested in
learning more about
Sageworks Credit
Analysis?
Questions