Introduction to Commercial Credit Analysis

The Purpose of Lending

The pivotal question upon which the lending decisions rests is the purpose for which the loan is sought. and this is usually the first issue that a Banker ascertains when approached for a loan or any other credit facility. In regard to this there are a few factors that must be remembered as these are critical.

  1. The nature of the credit facility sought must be consistent with the borrower’s activities.
  2. It must be for a matching need.

Alternatively, a manufacturer should not seek to finance a factory expansion with an overdraft. in short:

  1. A company that needs working capital to purchase inventories (stocks) and pay expenses should seek an overdraft.
  2. An exporter who needs finance to purchase goods to export should seek a pre shipment packing loan.
  3. An exporter who needs finance on goods exported under a usance letter of credit ( payment is made after 90 to 180 days after the acceptance of the documents by the buyer) should seek an export bill discount facility.
  4. An industrialist on the other hand who needs a large loan to finance an   expansion or build a factory or buy some very expensive machinery should seek a term loan. This is a loan that is payable over a period of time. Often, due to the gestation period, banks would give a moratorium regarding payment of interest and principal for a year or so.
  5. At times a loan may be required for a short period to ‘bridge two events”. This is known as a bridge loan. A company may have had a public issue to finance its expansion. In order not to hold up work until the final allotment is made and the monies are available to the company, it may seek a bridge loan.
  6. Certain companies and industries require facilities seasonally. A classic example is the sea food industry. It requires finance soon after the monsoons to purchase and process seafood for export. During the monsoons no finance is usually required. Similarly the tea industry requires finance when there is no picking of tea – to replant tea and to maintain the tea gardens.

It is important that a prospective client is honest and open with his banker. If he needs to utilise a loan for a particular purpose, he should tell the banker exactly what the purpose is. He should advise his banker his concerns and his problems. Bankers are there to help and not to hinder. If the banker has a full appreciation of his clients’ concerns; his strengths and his weaknesses and he is convinced of the person’s integrity, the banker will go out of his way if required to sanction the loan. It is always better to apprise the banker of all the issues at the outset – especially the more crucial ones. It would be very difficult to explain at a later stage why something of crucial importance was not mentioned. An omission of an important issue may also make the banker wonder whether there are any others that have not been mentioned which may be critical. Honesty and transparency is without doubt the best policy.

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