Credit Analysis

credit analysis

It is one of the many terms used to describe the process that a business credit manager goes through to determine a customer’s creditworthiness after they apply for a line of trade credit. Credit analysis process involves a through review of a business to determine its view ability to pay. Business credit managers must  evaluate the information provided in the credit application by analyzing financial statements, applying credit analysis ratios, and reviewing trade references.

Credit Analysis Ratios

Financial statement provide a lot of valuable insight. Making it easier to for business credit managers to rate a potential customer’s creditworthiness. Credit applicants that are companies or those that seek a large line of credit can be ask to provide a financial statement.

Three common analysis ratio:

Working Capital – It represents the funds available to finance current business operations. It is the difference between current assets and current liabilities. A business with a should be able to pay its bills and operate successfully.

Quick Ratio – Sometimes it called a “acid test” or “liquid ratio”. It measures the extend to which a business can cover its current liabilities. With those current liabilities with those current assets readily convertible to cash. Only cash and accounts receivable are include. As inventory and other current assets would require time and effort to convert into cash.

Current liabilities to Net worth – This ratio indicates the amount due to creditors within a year as percentage of the owners or stockholders investment. The smaller net worth and larger net liabilities, the less security for creditors.

Trade References

They are sometimes request in a credit application to show that the applicant has honored previous credit requests. Many business do report their accounts receivable data to business credit bureaus. These trades references are an incredibly useful resource to business credit managers to assess the payment habits of how a company has paid its other vendors.

Quick and Easy Credit Analysis Solutions

A through credit analysis process is critical to protect the company’s financial well being. The process can be labor intensive and time consuming. Smaller businesses that evaluate a limited number of customers may choose to keep the credit analysis process manual. Which can take anywhere from one to several days to make an informed credit decision. The process a large volume of credit applications typically manage their accounts using more sophisticated credit risk management software and solutions. Credit analysis is a component of risk management. And it is essential for making sound lending decisions and protecting your company’s cash flow.