TOOL B2
This tool helps you to form a judgement on whether a company’s need for additional funding is genuine, or the result of high risk cash leakage such as losses or other reasons that increase credit risk.
1. Check the description and purpose of the credit need
2. Check the requested credit amount
3. Check the proposed facility
ANALYTICAL APPROACH
Description and purpose of Credit Need
- How is the credit need described?
- Are the description and purpose of the credit need sufficiently clear?
- Is the credit request in compliance with credit policy guidelines?
- Is the credit need consistent with your understanding and analysis of the business?
- Is the credit need consistent with your financial analysis of the business?
- Will the purpose of the credit need significantly change the client’s risk profile
- Is it refinancing or additional debt to increase leverage?
- Is it for a different type of business?
- Will it weaken the capital structure via payments to shareholders?
Caution with descriptions such as ‘for fiscal purposes’ or ‘general working capital’
Caution: misuse of funds results in bad debts!
Description and purpose of Credit Need
- • Is the amount requested consistent with the described credit need?
- Note: a company’s need and the facility amount may be different
- Is the amount consistent with projected cash flows?
- Is the company also reliant on other sources of funding?
- Identify those other sources of funding
- Assess the certainty that the other funding will be forthcoming
Description and purpose of Credit Need
- Is the facility type appropriate for financing the credit need?
- Is the proposed legal entity the most appropriate borrower / counterparty?
- In case of refinance risk: how certain is the repayment source, and is the real tenor of this credit exposure compatible with the refinancing risk?
- Does the company require any ancillary products?
- Check for swap lines, FX forwards/futures, interest rate forwards, etc.
- Does the bank wish to oblige the company to use any other products to hedge / reduce risk in any area?
Low utilisation of facility limits means inefficient use of Economic Capital. Can this be compensated by pricing or other products & services?
Ensure that the client’s credit need is not linked to fraudulent transactions. Knowing your customer and understanding the business is the best way to avoid this risk
