Credit Analyst Interview Question
Hi everyone, need some advice on an interview question. If the interviewer asked "if company A came to you and asked for a loan of $10k, how would you determine whether or not you would lend to them?" how would you answer this?
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Revenues - recurring component, if any long standing client relationships, contracted revenues if applicable
Costs - what’s FC/VC structure, how costs scale with revenues, hedge against inflation - pass through to customers, fixed pricing contracts, etc.
EBITDA - if margins increase over time in case it’s not already a mature company, if margins are defensible
Capex - Maintenance/Fixed Capex split
Assets - What rights/claims do you as a lender have in case of bankruptcy/liquidation/restructuring
Structure - How close are you to the OpCo in case financing is at some other level: structural subordination details
Documentation - Details on contractual subordination or otherwise in the lending structure in case there are multiple levels of debt
If you are applying for a role in a traditional commercial credit training program, here's an alternative, more simple answer using the 5 Cs of Credit:
1) Character: What's the company and company owner's (if privately held) reputation? Does the company have a history of paying back its loans? Has it or any of its owner(s) declared bankruptcy? I'd Google the company, check the news and run a legal search.
2) Cash Flow: Is the company cash flow positive? Let's assume it's a $10K line of credit at Prime + 1.00%. Can the company's cash flow handle the interest expense? If you want to assume it's a term loan, can they handle the debt service with 1.20x or more coverage?
3) Capacity: Assuming it is a line of credit for working capital, the rule of thumb for a generic bank loan is 10% - 30% of revenues. If they want a $10K loan, you would like to see minimum $35K (rough estimate) of revenue. You would also want to see that they have net worth such that they will have a reasonable debt to equity ratio. So, for example, you want to see net worth of $20K or more.
4) Collateral: What kind of collateral can this company offer? I would look for collateral worth slightly more than $10K if it's good, easily saleable collateral; and worth significantly more if it's going to be tough to liquidate.
5) Conditions: What are the economic headwinds and tailwinds in the company's industry?
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