CREDIT

PROCESS

By Jawwad Ahmed Farid

C R E D I T P R O C E S S

CONTENTS
CREDIT PROCESS .................................................................................................................................... 5
1. MINDSET ...................................................................................................................................... 5
i.
ii.
iii.
iv.
2.

Intent ................................................................................................................................................... 5
Classification ...................................................................................................................................... 5
Pricing ............................................................................................................................................... 6
Fit ...................................................................................................................................................... 6
UNDERSTANDING THE LANGUAGE ....................................................................................................... 6

i. Capital Structure ................................................................................................................................. 6

ii. Debt (Leverage) .................................................................................................................................. 6
iii. Maturity ............................................................................................................................................ 7
iv. Default ............................................................................................................................................... 7
v. Interest ............................................................................................................................................... 8
vi. Commitment Fees ............................................................................................................................. 8
vii. Credit Culture ................................................................................................................................... 9
viii. Liquidation costs ............................................................................................................................. 9
ix. Creditworthiness ............................................................................................................................... 9
x. Work-out and Charge off ................................................................................................................... 9
xi. Owners Equity .................................................................................................................................. 10
xii. Bankruptcy ....................................................................................................................................... 10
xiii. Stakeholders ................................................................................................................................... 10
xiv. Credit Limit ...................................................................................................................................... 11
xv. Syndicate .......................................................................................................................................... 11
xvi. Basis Points ..................................................................................................................................... 11
xvii. Collateral ........................................................................................................................................ 11
3. WHY DO BUSINESSES BORROW MONEY? .............................................................................................. 12
i.
ii.
iii.
4.

Why does the firm need money, and what is it going to do with it? .................................................. 12
Why is the firm borrowing money? ................................................................................................... 13
Sources of Repayment ...................................................................................................................... 13
LENDING PRODUCTS ........................................................................................................................ 15

i. Line of Credit ....................................................................................................................................... 15

ii. Revolving Credit ................................................................................................................................. 15
iii. Bills discounting ................................................................................................................................ 16
iv. Term loans ........................................................................................................................................ 16
v. Consumer Loans ................................................................................................................................. 16
vi. Trade credit ....................................................................................................................................... 16
vii. Bonds ............................................................................................................................................... 16
5. REVIEW ........................................................................................................................................ 17
i.
ii.
iii.
6.

Credit Risk & Credit Analysis ............................................................................................................... 17

Credit Risk and Credit Spreads ........................................................................................................... 18
Credit Analysis Process ..................................................................................................................... 20
CREDIT CULTURE AND INFORMATION GATHERING FOUNDATIONS ............................................................. 22

i. Information Gathering - Foundations ................................................................................................. 24

7. INFORMATION GATHERING AND PROCESSING ....................................................................................... 26

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C R E D I T P R O C E S S

i. Information Gathering - Data .............................................................................................................. 26

ii. Information Processing ...................................................................................................................... 27
8. THE CREDIT DECISION ...................................................................................................................... 33
i.
ii.
iii.
iv.
9.

Accept / Reject .................................................................................................................................... 33

Term Sheets ....................................................................................................................................... 33
Loan Pricing ....................................................................................................................................... 34
Compliance & Documentation .......................................................................................................... 34
CREDIT DECISION - FACTORS ............................................................................................................. 35

i. Industry Analysis ................................................................................................................................. 35

ii. Business Analysis Other Qualitative Factors ................................................................................... 36
iii. Credit Rating Agencies ...................................................................................................................... 38
iv. Importance of Cash Flow Analysis in Credit Analysis ........................................................................ 39
v. Cash Flow Statements ........................................................................................................................ 39
10. ANALYZING CASH FLOW STATEMENTS: EXAMPLES ............................................................................... 42
Example 1- Office Depot ............................................................................................................................ 42
Example 2 Will and Can Inc .................................................................................................................... 44
DISCLAIMER .......................................................................................................................................... 46

Please do not photocopy or distribute without permission. All rights reserved Alchemy Software Pvt Limited.
http://FourQuants.com
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