A business credit analysis is the process of determining if an organization is eligible for credit. This is typically accomplished via examination of the company’s financial statements. Other factors such as financial ratios, company history, and overall trends will often also be considered. Cash flow is an important element of the analysis as well. The overall goal is to determine if the business is and will likely continue to be able to pay back a loan, or in some cases, to honor issued bonds.
When performing a business credit analysis, it is common to examine the past, present, and projected future of the company. Records from the past can demonstrate how well the company handles finances, outside influences, and any other factors that can affect cash flow. An accurate picture of the current state of the company can give an analyst an idea of daily management techniques and how they affect the well-being of the organization. Understanding the past and present will usually give the analyst the tools necessary to make forecasts about the future health of the company.
A complete business credit analysis will outline the general cycle of finances to be expected from the company. It will also demonstrate an understanding of the strong and weak points of the company and their significance. A strong analysis will also include information about how the company manages debt, in addition to how much it will likely be able to handle. It may also include a worst case scenario for if the company falls on hard times.
Good business credit analysis will look past current trends in favor of the big picture. For example, a company may be currently experiencing fast growth, but that does not necessarily mean that it is a good candidate for a loan or issuing bonds. That growth will typically be examined carefully. The analyst will determine if it is a temporary boost based on a fleeting external factor or if it is the result of the company achieving awareness in a market that has a long-term need for its services. There will also likely be analysis of past growth to see if it was steady and forecasts to determine if growth will continue to be steady in the future.
Some other factors an analyst may consider are the overall ethics of the company, what the money is needed for in the case of a loan, and what collateral is available. The first factor establishes intent and determines whether the company has the integrity to follow through on financial obligations. It is important to also analyze what the loan will be used for in order to determine whether or not it will be successful enough for the company to pay back money borrowed. The analyst should also determine whether the collateral offered is sufficient to cover financial responsibilities.
