Credit Analysis
What factors do lender take in to consideration when granting unsecured revolver and unsecured term loan to Small and Medium Enterprises ?
#interview question
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Pretty standard stuff like ability to generate positive operating cash flow, current/pro forma leverage, coverage (debt service, fixed charges). Are they a capital-intensive business? What are their working capital needs like? You wanna make sure you don't put up too big of a revolver commitment. Also important to consider management's distribution patterns? Are they keeping money in the business or taking excessive dividends? Since the facilities are unsecured, how can you mitigate the risk that comes with the unsecured nature of the facilities? Maybe trying to get a 100% or limited personal guarantee from the owners of the business, which is pretty common in commercial lending. You can also have tighter covenants, impose some restrictions on dividend distribution size, etc. You can put a higher spread on the debt but I think all of these factors are also dependent on the borrower's overall credit risk rating/ credit profile. Hope that helps a little
Oh for the structural enhancements, you can probably have frequent reporting requirements or annual audited statements (again, depending on the borrower's credit profile). A lot of the structural components are also influenced by competition. You can structure a fairly sound deal but banking is pretty competitive and theres always gonna be some bank out there offering less strict covenants, reporting reqs, spread, etc
As someone who underwrote these types of credits, these are the answers you seek.
5 C's
Or 1 ‘C’ five times
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