Credit Evaluation

Credit Evaluation and approval is a process to get approved or be eligible for granting a loan from lenders for payment of goods services for an extended period. To grant credit approval, willingness of the lender to lend money is important and so is the willingness of the borrower to return the funds with interest on the decided period. Typically small business firms seek credit from their vendors, investors and lenders. Similarly, they should give credit approval to their customers.

There are various ways the lenders see to for credit approval to the borrowers. If both lender and borrower are businesses then they seek for various financial tools for credit evaluation and then approve it. These tools may be Balance Sheet, P&L Statement, Cash Flow Statement, Inventory Turnover Ratio, etc.

Some of the Factors that a lender seek for approving credits are-

• Credit Worthiness: Trustworthiness, high credit ratings are some points kept in mind.
• Debt Burden: Limited debt or borrowings by companies, more of earning power.
• Borrowing Frequency: Some borrowers borrow funds frequently which can be a cause to their reputation.
• Commitment Length: As the lending period increases, so does the risk of back payment. To cover such risk lenders charge higher interest rates after a certain period.

These are some basics kept in mind by lenders before approving credit.

Thank You

Regards

Author – Nidhi Malde

Kautilya

IBS Mumbai