Business Credit Analysis: How Does It Work?
Whenever an individual or legal entity requests a postpaid card, a credit analysis is carried out. This analysis allows us to assess the debtor’s ability to comply with the agreement. To this end, the risk involved in the transaction is defined.
Financial institutions use a scorecard and criteria to define which factors enable the identification of a possible default on the part of the customer . It is based on this scorecard and the data generated that credit is granted or not. It is also based on this data that interest rates, credit conditions and terms are considered.
What factors are considered in credit analysis?
The factors in the table we discussed above may vary slightly from institution to institution. However, the main criteria to be taken into account in the credit analysis are the following:
Registration data
Legal entities must submit the company registration, bank restrictions (if any), turnover figures and other accounting-related figures . Some documents related to ownership of assets or documents proving that the company will be able to repay the loan may also be requested.
The financial institution also checks whether you have had any problems with non-payments or delays so that it can make a better decision about the loan and its conditions.
Registration restrictions
If the company requesting the loan has registration restrictions , this can be a very important factor to be taken into account when analyzing and granting credit. To do so, they consult some certificates, such as the Certificate of Debts Relating to Federal Tax Credits and the Active Debt of the Union , in order to identify whether there are any restrictions, or if there have ever been any.
Profile analysis
Financial institutions use the Credit Score technique to determine the profile of the credit applicant . The Credit Score has a very strong statistical basis, and with it it is possible to determine whether the legal entity will be in agreement with the amount of loan requested.
Proof of billing
It is very common for institutions to ask for proof of income or turnover to assess your payment capacity. This way, they will be able to determine the maximum amount they can lend you without running the risk of not receiving the money or receiving it late.
As a rule, these values are around 20 and 30% of income.
Stages of a credit analysis
As we have seen, credit analysis is essential for institutions to determine whether a given person will be able to pay all of their monthly installments. Although the steps of the analysis are carried out differently from financial institution to institution, they all follow an identical timeline.
Preliminary Analysis
This is the information collection phase . This includes registration data, registration restrictions, and whether there are any cases of non-payment.
This is when the institution has access to your business profile, which includes data such as business type, location, among others.
During the preliminary analysis, you will be asked for the necessary documents to prove your economic and financial situation. Here you can ask for:
- List of revenues from the last 2 years
- Copy of the Articles of Association
- Balance Sheet for the last 2 years
- Trial balance of the last period
- Legal entity bank statement for the last three months
- Bank debt
- Guarantor’s IRPF
- Authorization to consult the DOc Risk Center
If all documentation is submitted promptly and correctly, it is possible to move on to the next stage of the credit analysis if the company is approved at this preliminary stage.
Conclusive Analysis
Once companies pass the preliminary analysis, they move on to the conclusive analysis. This is where a more rigorous analysis is carried out. The institution may contact some customers, for example, to seek some information.
An in-depth analysis of what the company does, how it is developing, and what future projects it has can also be carried out . This way, it is possible to interpret the information and numbers correctly. Note that accounting, revenue, and debt depend greatly on the segment and sector of activity, as well as the size of the company.
Credit granting institutions also analyze the company’s credit history. They also analyze the debt at the (Dow Risk Center). The latter requires the applicant’s authorization. However, it is important to be aware that if you refuse to give this authorization, your loan will most likely be denied.
Companies that have previously applied for loans are not at a disadvantage compared to those that have never applied for them. The important thing is that the repayment of their loans has been carried out in accordance with what was agreed between the parties.
At this stage, an analysis of the company’s figures is also carried out . This includes revenue data, seeking information that justifies any fluctuations in the same. This is achieved through an economic-financial analysis of the balance sheets and income statements.
After analyzing all the data sent by the credit applicant, an interview is scheduled to clarify any points that may not have been clear enough. It is possible that references from suppliers and customers may be checked.
Based on all the information provided and gathered, the company is assessed and assigned a rating . Each rating is associated with an interest rate. Therefore, the higher the company’s rating, the greater the risk of default, and therefore, the higher the interest rate.
