Credit Analysis is a process in which a lender goes through a process of review prior to granting a loan.
A loan application needs to undergo a process to ensure a money lender’s collectability over the borrowed money. The results derived from a credit analysis gives the borrower more credibility to be granted a loan and that the risk of collection will be probable. Credit Analysis is a much specific process that is applied for Risk Management. It has basically two major categories which are Financial Credit Analysis and Non-Financial Credit Analysis.
Financial Credit Analysis
This area of credit analysis involves the review of a borrower’s financial statements, if it is an organization or asset and income for individuals. It is focused on the monetary value a borrower may to allow the lender to have a quantitative basis of granting the borrower a loan. Review of these financials will enable the lender to see how stable the source of income or earnings are for the borrower.
It also provides a security for the lender to be able to collect from the borrower’s asset when sold if borrower loses the source from which it is earning income from.
Non-Financial Credit Analysis
Not everything is granted with having enough monetary value alone. The area of going through a credit analysis on a non-financial aspect is also important. For working individuals, it is often reviewed that operations will not cease during the quick cash loan period.
This ensures that the salary loan will be paid as it is presumed that income will be sufficient based on a financial credit review. Character is taken into consideration when a non-financial credit analysis is made. An individual who may be liquid and financially capable of paying may still be rejected if there is bad payment history.
Oftentimes, the non-financial credit analysis done on character and other conditions that may affect the loan is given more bearing since the lender’s intention is to be able to collect with less efforts. An individual or company who has a good character background will often find ways and work with the lender when they become illiquid or insolvent.