Analysis of financial statements for credit apprisal

Abstract

Most businesses nowadays cannot survive without lending money. In a quest for survival and expansion, companies need to resort to debt as equity alone cannot suffice the requirements. Whether it is financing a new project, meeting working capital or expanding to a new market, a company requires funding at each stage.

Credit analysis is defined as the evaluation of the ability of a company to repay its financial obligations. In our country the credit or debt markets are not as mature as compared to global standards, hence there is excessive dependence on the traditional banking system. However, companies issuing bonds to raise finance is also not uncommon.

Credit default or in simple words, inability to pay the debt, is one of the most dreaded risks in the financial world. A bank should ask for updated firm’s financial statements or additional financial information such as working capital, reserves, debtors, creditors, other bank loans etc, and comparative list with the previous year levels.