Presentation6 credit risk (Bank Management)

Lending principles and the business

borrowerDias Satria

5C of credit

Character

Capacity

Capital

Collateral

Condition

5C of credit 1. The first factor is character, which refers to a borrower's

reputation.

2. Capacity measures a borrower's ability to repay a loan by comparing income against recurring debts.

3. The lender will consider any capital the borrower puts toward a potential investment, because a large contribution by the borrower will lessen the chance of default.

4. Collateral, such as property or large assets, helps to secure the loan.

5. Finally, the conditions of the loan, such as the interest rate and amount of principal, will influence the lender's desire to finance the borrower.

5C of credit 1. your company generates enough CASH FLOW to

service the requested debt,

2. there is sufficient COLLATERAL to cover the amount of the loan as a secondary source of repayment should the company fail,

3. there is enough CAPITAL in the company to weather a storm and to ensure the owner’s commitment to the company,

4. the CONDITIONS surrounding your business do not pose any significant unmitigated risks, and

5. the owners and management of the company are of sound CHARACTER, people that can be trusted to honor their commitments in good times and bad.

Character• Character refers to the business, its management and the

shareholders who are going to guarantee the loan.

• There is some subjective nature to this category and a good lender can know a potential borrower has good character without looking at credit reports.

• However, credit reports and financial statements are important.

• Questions that help a lender decide on the character of a business include: o does the company pay its vendors on time?

o Has the business been through tough times and did they work through them or did they file bankruptcy?

o Most lenders will say that they don’t want to make loans to businesses or consumers unless they are 100% confident in the potential borrower’s character.

• Source: http://www.businessbankoftexas.com/banks-use-the-5-“c”s-of-lending-to-make-business-loans.htm

Character• When lenders evaluate character, they look at

stability — for example, o how long you’ve lived at your current address,

o how long you’ve been in your current job, and

o whether you have a good record of paying your bills on time and in full.

• If you want a loan for your business, the lender may

consider your experience and track record in your

business and industry to evaluate how trustworthy

you are to repay.

Capacity (cash flow)• Capacity refers to a business’ ability to take on

additional debt. It is measured by looking at various

financial benchmarks of a company.

• The bank will make a judgment about whether a

business is operating within its abilities to both

financially and operationally meet all its operations.

Capacity• Your banker needs to be certain that your business

generates enough cash flow to repay the loan that

you are requesting.

• In order to determine this the banker will be looking

at your company’s historical and projected cash

flow and compare that to the company’s

projected debt service requirements.

• There are a variety of credit analysis metrics used by

bankers to evaluate this, but a commonly used

methodology is the “Debt Service Coverage Ratio”.

Capacity• Typically the bank will look at the company’s historical ability

to service the debt. This means the banker will compare the company’s past 3 years free cash flow to projected debt service, as well as the past twelve months to the extent your company is well into its fiscal year.

• While projected cash flow is important as well, the banker will generally want to see that the company’s historical cash flow is sufficient to support the requested debt.

• Usually projected cash flow figures are higher than historical figures due to expected growth at the company, however your banker will view the projected cash flows with skepticism as they will generally entail some level of execution risk.

• To the extent that the historical cash flow is insufficient and the banker must rely on your projections, you must be prepared to defend your future cash flow projections with information that would give your banker visibility to future performance, such as backlog information.

Capacity• Capacity refers to considering your other debts and

expenses when determining your ability to repay

the loan.

• Creditors evaluate your debt-to-income ratio, that

is, how much you owe compared to how much you

earn.

• The lower your ratio (debt-to-income ratio), the

more confident creditors will be in your capacity to

repay the money you borrow

Collateral• Profits being generated from operations are always the first

source of repayment of a business loan.

• Nearly every bank loan made has collateral securing it. Even a personal guarantee from a principal shareholder is considered collateral. A lender must evaluate the collateral as a second and possibly third source of repayment if a business is unable to repay its loan.

• Questions a lender must ask itself are: how much is the collateral worth if it must be liquidated? How long might it take to convert the collateral into cash for loan repayment; and is the collateral hard to find and collect (such as accounts receivable)?

• Some lenders like real estate because they believe it has historically been good collateral, while others prefer quicker to collect assets like accounts receivable. Every bank has its own preference. Depending on the kind of asset, a lender may discount the value when considering its value for a loan.

Collateral• In most cases, the bank wants the loan amount to

be exceeded by the amount of the company’s

collateral. The reason the bank is interested in

collateral is as a secondary source of repayment of

the loan.

• If the company is unable to generate sufficient cash

flow to repay the loan at some point in the future,

the bank wants to be comfortable that it will be

able to recover its loan by liquidating the collateral

and using the proceeds to pay off the loan.

Collateral• Collateral refers to any asset of a borrower (for

example, a home) that a lender has a right to take

ownership of and use to pay the debt if the

borrower is unable to make the loan payments as

agreed.

• Some lenders may require a guarantee in addition

to collateral. A guarantee means that another

person signs a document promising to repay the

loan if you can’t.

Capital• Banks and other lenders want to see a business borrower

have some “at risk” capital in a transaction.

• Commercial real estate loans in Texas typically require a 10 to 25% down payment from the borrower, though it is not unusual to see real estate being refinanced at a rate of 50% loan to value.

• Every transaction is treated differently and other collateral the business may be willing to pledge may enhance the transaction and the increase the amount of a loan.

• Always remember though that the business loan being made must meet certain debt service coverage ratios. Simply put, a business must be able to repay their loan and still have monthly cash flow to safely operate.

Capital• When it comes to capital, the bank is essentially looking

for the owner of the company to have sufficient equity in the company. Capital is important to the bank for two reasons.

• First, having sufficient equity in the company provides a cushion to withstand a blip in the company’s ability to generate cash flow.

• For example, if the company were to become unprofitable for any reason, it would begin to burn through cash to fund operations. The bank is never interested in lending money to fund a company’s losses, so they want to be sure that there is enough equity in the company to weather a storm and to rehabilitate itself.

• Without sufficient capital, the company could run out of cash and be forced to file for bankruptcy protection.

Capital• Secondly, when it comes to capital, the bank is looking for the

owner to have sufficient “skin in the game”. The bank wants the owner to be sufficiently invested in the company such that if things were to go wrong, the owner would be motivated to stick by the company and work with the bank during a turnaround.

• If the owner were to simply hand over the keys to the business, it would clearly leave the bank fewer (and less viable) options on how to obtain repayment of the loan.

• There is no precise measure or amount of “enough capital”, but rather it is specific to the situation and the owner’s financial profile. Commonly, the bank will look at the owner’s investment in the company relative to their total net worth, and they will compare the amount of the loan to the amount of equity in the company – the company’s Debt to Equity Ratio. This is a measure of the company’s total liabilities to shareholder’s equity. Banks typically like to see Debt to Equity Ratios no higher than 2 to 3 times.

Capital• Capital refers to your net worth — the value of your

assets minus your liabilities. In simple terms, how

much you own (for example, car, real estate, cash,

and investments) minus how much you owe.

Conditions• Conditions of a business loan are the last “C”. Sometimes

conditions are also known as loan covenants. The usual conditions that business borrowers must follow are: providing the lender company financial statements on a quarterly or other periodic schedule and reporting to the lender any material changes in the company’s financial position.

• Nearly all banks require any loans made by shareholders or company insiders to be subordinate to their loan. Many banks require key man life insurance on the principals of a company. The bank may also require the company to maintain certain financial performance ratios.

• As a potential business borrower, knowing the five “C”s that lenders use may help you better understand how to have the best chance of securing a business loan when you need one.

Conditions• Another key factor in the five C’s of credit is the overall

environment that the company is operating in.

• The banker is going to assess the conditions surrounding your company and its industry to determine the key risks facing your company, and also, whether or not these risks are sufficiently mitigated.

• Even if the company’s historical financial performance is strong, the bank wants to be sure of the future viability of the company. The bank won’t make a loan to you today if it looks like the viability of your company is threatened by some unmitigated risk that is not sufficiently addressed. In this assessment, the banker is going to look to things such as the following:o The competitive landscape of your company - who is your competition? How do you

differentiate yourself from the competition? How does the access to capital of your company compare to the competition and how are any risks posed by this mitigated? Are there technological risks posed by your competition? Are you in a commodity business? If so, what mitigates the risk of your customers going to your competition?

Conditions• The nature of your customer relationships – are there any

significant customer concentrations (do any of your customers represent more than 10% of the company’s revenues?) If so, how does the company protect these customer relationships? What is the company doing to diversify its revenue base? What is the longevity of customer relationships? Are any major customers subject to financial duress? Is the company sufficiently capitalized to withstand a sizable write-down if they can’t collect their receivable to a bankrupt customer?o Supply risks – is the company subject to supply disruptions from a key supplier?

How is this risk mitigated? What is the nature of relationships with key suppliers?

o Industry issues – are there any macro-economic or political factors affecting, or potentially affecting the company? Could the passage of pending legislation impair the industry or company’s economics? Are there any trends emerging among customers or suppliers that in the future will negatively impact operations?

Conditions• Lenders consider a number of outside

circumstances that may affect the borrower’s

financial situation and ability to repay, for example

what’s happening in the local economy. If the

borrower is a business, the lender may evaluate the

financial health of the borrower’s industry, their

local market, and competition.

Bank BRI• http://www.bri.co.id/subpage/3

BNI

Bank Mandiri

Bank Mandiri

Kebijakan umum permohonan kredit

1. Surat permohonan fasilitas kredit.

2. Legalitas usaha.

3. NPWP dan Laporan Keuangan.

4. Hubungan dengan bank.

5. Pengalaman usaha.

6. Batas maksimum kredit bagi badan usaha.

7. Persyaratan penempatan staf BNI

atahttp://www.blogger.com/blogger.g?blogID=8604366819472339454#

editor/target=post;postID=6879892678622958295u pihak ketiga lainnya.

8. Fasilitas Forex Line.

9. Persyaratan Take Over debitur dari bank lain.

10. Referensi agungan untuk kredit yang ditake over dari bank lain Skim

pemberian fasilitas kredit dengan agunan deposito berjangka oleh divisi

korporasi atau UMN / SKM ( diambil dari beberapa sumber )

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