Every business needs some resources in order to function. In this presentation we take a look at what these resources are and the kind of questions that should be asked by lenders to determine whether the resources are adequate and well managed.

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2. Every business needs
some resources to
function properly. It’s
important in credit
assessment to get a
feel for how well these
resources are managed
and maintained.

3. These resources can be broadly
classified as;
Physical resources; e.g. property, plant
and equipment, vehicles
Financial resources; owners’ capital
and access to external funding such as
bank loans, and
Human resources; e.g. skilled workers,
unskilled workers and staff

5. For the moment we can
leave the financial
resources out of the
discussion as we
consider the business’s
financial position in
other presentations.

6. Property; the bank will be interested to
know whether the property from which
the business operates is owned or leased
and whether it’s in good condition and
suitable for
the purpose
of the
business’s
operation.

7. The reason for this is that,
if the property is owned by
the business, it might give
the bank an opportunity to
obtain some tangible
collateral, should it be
required.

8. To explore this
collateral possibility further,
the bank would want to know the current
market value of the property and whether
there is already a mortgage bond
registered in favour of another lender.

9. Even if the bank does not
require collateral, any surplus
value in the property will
certainly serve as a potential
secondary source of repayment
should something go wrong
with the business’s cash
flow in the future.

10. If the property is leased, important
questions to consider are the length of
time remaining on the lease, the current
lease payments and the annual
escalation clause, if any, so that the
bank can get a sense of current and
future financial commitments and
whether the lease payments will put a
strain on future cash flow.

11. Finally, whether the
property is owned or
leased, the bank would
want to ask whether
there will be a need to
expand or to move to
alternative premises in
the near future.

12. Plant & machinery; is
there a need to replace
plant and machinery? Is
it well maintained and is
it reasonably up-to-date
technology?
What will be the
cost of replacement
and has the business
made any provision for
replacement?

13. Labour; the bank will want to know
about the labour component as far as it
might impact on the business’
operations.

14. For example, if the workforce is
highly skilled because the business
provides a very
technical service
to its customers,
its continued
operation would
be reliant on the
workforce being
retained and fully functional.

15. There is a risk in this case that, if there
are generally very few people available
with the necessary technical skills, the
current workforce will wield more power
over the management than would
normally be the case and it may
be difficult for management to
implement policies and
procedures that may
not be to the advantage
of the workforce.

16. Also, consider how
close the business is to
its labour resource –
does the workforce
have to travel long
distances to get to
the business and is
there a supply of
labour available?

17. Operational capacity; this refers to
whether the business is operating at
full capacity or can still increase its
operational output without requiring
additional resources such as factory
space,
warehouse
space, labour
and so on.

18. This will give the bank an
idea of whether the
business can grow its
revenues without
additional investment in
fixed assets or working
capital as doing so will
enable it to generate
additional free cash flow.

19. Forex; does the business deal
in foreign currencies, either by
making sales overseas or
buying materials and inputs
from a foreign supplier?

20. Are Forward Exchange
Contracts used to fix the local
currency value at the time of
order/sale?
Are Letters of Credit required
for imports of raw
materials or other
inputs?
Is there a danger of
transfer risk or convertibility
risk?

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