Corporate credit is the qualification a company has to obtain a loan through a bank or lender. Companies borrow money for various reasons, although the majority of financing is for long-term assets or capital improvements. Before entering into a debt agreement with a business, banks and lenders will conduct a corporate credit analysis to assess the company's ability to repay borrowed funds. Most lenders conduct the same review process for all companies, while taking into consideration the size of the business.
Business Risk
Business risk is the potential for a company to have significant financial losses resulting from business operations. The risks can come from high levels of competition, poor economic conditions and financial risks from debt or equity financing. While all companies face business risk, an owner's and manager's ability to respond to these situations can affect the credit analysis. Business risk can be somewhat subject because a company may look fine today but face tough times in future years.
Financial Statements
Financial statements are detailed reports of a company's financial health. Banks and lenders use this information during the credit analysis to discover trends or review the company's history of financial performance. Using several sequential financial statements also allows banks and lenders to determine if the company properly records transactions in the correct time period or if it attempts to shift items from one month to the next for a better presentation.
Financial Ratios
Financial ratios are mathematical formulas applied to financial statements. These ratios provide economic indicators which allow for a comparative analysis between the company and the industry standard. Banks and lenders will measure a company's ability to meet current short-term debt, use of assets to generate revenues, profit margin on consumer goods and services or the long-term viability of a company's business operations.
Cash Flows
Cash flows represent the money coming in or out of the business from operations, investing or financing activities. Banks and lenders review cash flows because these are quite different than reporting net income. Cash flows are important because companies must be able to generate sufficient capital to repay the bank loan. Most banks and lenders require the payments regardless of the company's financial performance.
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