According to Robert et, under this approach the financial analyst can use the model of the four Cs of credit when evaluating a credit application:
● Capacity seeks to measure the ability of the borrower to generate funds that allow him to pay the obligation, for which it is necessary to perform an analysis of the financial statements, calculate the cash flows, in the case of firms it must be complemented with an economic assessment of trends in the industry, regulatory environment, and competitive position.
According to current regulations, each EIF must have debtor evaluation policies that allow evaluating the capacity to generate positive cash flows, their stability, their trend, and their sufficiency about with the structure of liabilities adjusted to the productive cycle of the business and the internal and external factors that could motivate a variation in the payment capacity both in the short and long term.
Regarding cash flows, and according to Vargas, the flow of operations, investment, and financing activities must be analyzed, to subsequently carry out the projection of the firm’s free cash flow and free cash flow for shareholders.
● Collateral, a credit operation can be with or without guarantee, collateral refers to all those elements available to the business or its owners, to guarantee the fulfillment of payment in the credit, that is to say, the guarantees or collateral support; They are evaluated through their fixed assets, their economic value and their quality. It is not advisable to determine the amount of the credit based on the value of the guarantee that supports the credit, the amount of the operation should be calculated based on what the client can pay and not on what could be seized if the contract is breached. credit.
One of the fundamentals of credit analysis establishes that credit should not be granted that does not have a second source of payment, unless the profit margin is very high, which would allow running a greater risk. Does this second source work like a plan B? If the client does not pay, some collateral options could be endorsement, promissory note, pledge, surety, credit insurance, security deposit, real estate guarantee.
● Conditions Robert et. states that the conditions consider the agreements that generate limitations and restrictions regarding the borrower’s activities, these can be affirmative, such as making the payment of interest and capital on time or complying with the tax payment; but they can also be negative (prohibitive), generating restrictions, for example, on the increase in debt; These restrictions can be evaluated using indicators such as the maintenance test or the debt contraction test and the cash flow test.
● Character, are the qualities of good repute and moral solvency that the debtor has to respond to a loan. To infer the future behavior of a debtor, it is necessary to use information about their payment habits and past behavior (How they have behaved in past credit operations) and present (How they are currently behaving about their payments) this will set a trend and therefore This is a probability of maintaining a similar behavior for future events.
The evaluation of the character or moral solvency of a client must be made from forceful, measurable, and verifiable elements such as requesting commercial references from other providers with whom you have credit, obtaining a report from the Credit Bureau, verifying legal claims, and obtaining bank references.
Robert et. indicates that character also implies the analysis of the quality of the administration, evaluating the policies and strategies of the business, such as strategic direction, financial philosophy, conservative tendency, historical record, successful planning, control systems, among other aspects.