CIMA F3 Syllabus A. Financial policy decisions - Lenders’ assessment of creditworthiness - Notes 1 / 3
People will lend money to us only if we are creditworthy
We should think of:
Business plans
People who will lend us money will want to see our business plan.
Within that business plan, they will want to know:
- How good the management are.
- What assets you have.
- What your gearing is. Higher gearing means higher debt and higher financial risk.
- SWOT analysisRatios
- Current ratios
- Gearing ratio
- Interest cover
- EBITDA to finance charges ratioCashflow Forecast
Can we provide the CF forecast?
It will help them to forecast whether we will be able to finance the loan.
They will be interested especially in the CF from Operating activities.
Credit rating
What is our credit rating?
The higher the credit rating, the better.
It will effect the interest rate that we will be charged.
Quality of management
Their experience, qualification.
Their integrity.
Their commitment to pay off the loan.
Factors that affect the level of credit risk for a company include:
The total value of credit sales
The payment terms granted to customers
Policies for recovering outstanding debts