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Lending principles
and the business
borrower
Dias Satria
5C of credit
Character
Capacity
Capital
Collateral
Condition
5C of credit
1. The first factor is character, which refers to a borrower's
reputation.
2. Capacity measures a borrower's ability to repay a loan
by comparing income against recurring debts.
3. The lender will consider any capital the borrower puts
toward a potential investment, because a large
contribution by the borrower will lessen the chance of
default.
4. Collateral, such as property or large assets, helps to
secure the loan.
5. Finally, the conditions of the loan, such as the interest
rate and amount of principal, will influence the lender's
desire to finance the borrower.
5C of credit
1. your company generates enough CASH FLOW to
service the requested debt,
2. there is sufficient COLLATERAL to cover the amount of
the loan as a secondary source of repayment should
the company fail,
3. there is enough CAPITAL in the company to weather a
storm and to ensure the owner’s commitment to the
company,
4. the CONDITIONS surrounding your business do not pose
any significant unmitigated risks, and
5. the owners and management of the company are of
sound CHARACTER, people that can be trusted to honor
their commitments in good times and bad.
Character
• Character refers to the business, its management and the
shareholders who are going to guarantee the loan.
• There is some subjective nature to this category and a good
lender can know a potential borrower has good character
without looking at credit reports.
• However, credit reports and financial statements are
important.
• Questions that help a lender decide on the character of a
business include:
o does the company pay its vendors on time?
o Has the business been through tough times and did they work through them or did
they file bankruptcy?
o Most lenders will say that they don’t want to make loans to businesses or consumers
unless they are 100% confident in the potential borrower’s character.
• Source: http://www.businessbankoftexas.com/banks-use-the-
5-“c”s-of-lending-to-make-business-loans.htm
Character
• When lenders evaluate character, they look at
stability — for example,
o how long you’ve lived at your current address,
o how long you’ve been in your current job, and
o whether you have a good record of paying your bills on time and in full.
• If you want a loan for your business, the lender may
consider your experience and track record in your
business and industry to evaluate how trustworthy
you are to repay.
Capacity (cash flow)
• Capacity refers to a business’ ability to take on
additional debt. It is measured by looking at various
financial benchmarks of a company.
• The bank will make a judgment about whether a
business is operating within its abilities to both
financially and operationally meet all its operations.
Capacity
• Your banker needs to be certain that your business
generates enough cash flow to repay the loan that
you are requesting.
• In order to determine this the banker will be looking
at your company’s historical and projected cash
flow and compare that to the company’s
projected debt service requirements.
• There are a variety of credit analysis metrics used by
bankers to evaluate this, but a commonly used
methodology is the “Debt Service Coverage Ratio”.
Capacity
• Typically the bank will look at the company’s historical ability
to service the debt. This means the banker will compare the
company’s past 3 years free cash flow to projected debt
service, as well as the past twelve months to the extent your
company is well into its fiscal year.
• While projected cash flow is important as well, the banker will
generally want to see that the company’s historical cash flow
is sufficient to support the requested debt.
• Usually projected cash flow figures are higher than historical
figures due to expected growth at the company, however
your banker will view the projected cash flows with skepticism
as they will generally entail some level of execution risk.
• To the extent that the historical cash flow is insufficient and the
banker must rely on your projections, you must be prepared to
defend your future cash flow projections with information that
would give your banker visibility to future performance, such
as backlog information.
Capacity
• Capacity refers to considering your other debts and
expenses when determining your ability to repay
the loan.
• Creditors evaluate your debt-to-income ratio, that
is, how much you owe compared to how much you
earn.
• The lower your ratio (debt-to-income ratio), the
more confident creditors will be in your capacity to
repay the money you borrow
Collateral
• Profits being generated from operations are always the first
source of repayment of a business loan.
• Nearly every bank loan made has collateral securing it. Even a
personal guarantee from a principal shareholder is considered
collateral. A lender must evaluate the collateral as a second
and possibly third source of repayment if a business is unable
to repay its loan.
• Questions a lender must ask itself are: how much is the
collateral worth if it must be liquidated? How long might it take
to convert the collateral into cash for loan repayment; and is
the collateral hard to find and collect (such as accounts
receivable)?
• Some lenders like real estate because they believe it has
historically been good collateral, while others prefer quicker to
collect assets like accounts receivable. Every bank has its own
preference. Depending on the kind of asset, a lender may
discount the value when considering its value for a loan.
Collateral
• In most cases, the bank wants the loan amount to
be exceeded by the amount of the company’s
collateral. The reason the bank is interested in
collateral is as a secondary source of repayment of
the loan.
• If the company is unable to generate sufficient cash
flow to repay the loan at some point in the future,
the bank wants to be comfortable that it will be
able to recover its loan by liquidating the collateral
and using the proceeds to pay off the loan.
Collateral
• Collateral refers to any asset of a borrower (for
example, a home) that a lender has a right to take
ownership of and use to pay the debt if the
borrower is unable to make the loan payments as
agreed.
• Some lenders may require a guarantee in addition
to collateral. A guarantee means that another
person signs a document promising to repay the
loan if you can’t.
Capital
• Banks and other lenders want to see a business borrower
have some “at risk” capital in a transaction.
• Commercial real estate loans in Texas typically require a
10 to 25% down payment from the borrower, though it is
not unusual to see real estate being refinanced at a rate
of 50% loan to value.
• Every transaction is treated differently and other
collateral the business may be willing to pledge may
enhance the transaction and the increase the amount
of a loan.
• Always remember though that the business loan being
made must meet certain debt service coverage ratios.
Simply put, a business must be able to repay their loan
and still have monthly cash flow to safely operate.
Capital
• When it comes to capital, the bank is essentially looking
for the owner of the company to have sufficient equity in
the company. Capital is important to the bank for two
reasons.
• First, having sufficient equity in the company provides a
cushion to withstand a blip in the company’s ability to
generate cash flow.
• For example, if the company were to become
unprofitable for any reason, it would begin to burn
through cash to fund operations. The bank is never
interested in lending money to fund a company’s losses,
so they want to be sure that there is enough equity in the
company to weather a storm and to rehabilitate itself.
• Without sufficient capital, the company could run out of
cash and be forced to file for bankruptcy protection.
Capital
• Secondly, when it comes to capital, the bank is looking for the
owner to have sufficient “skin in the game”. The bank wants the
owner to be sufficiently invested in the company such that if
things were to go wrong, the owner would be motivated to stick
by the company and work with the bank during a turnaround.
• If the owner were to simply hand over the keys to the business, it
would clearly leave the bank fewer (and less viable) options on
how to obtain repayment of the loan.
• There is no precise measure or amount of “enough capital”, but
rather it is specific to the situation and the owner’s financial
profile. Commonly, the bank will look at the owner’s investment in
the company relative to their total net worth, and they will
compare the amount of the loan to the amount of equity in the
company – the company’s Debt to Equity Ratio. This is a measure
of the company’s total liabilities to shareholder’s equity. Banks
typically like to see Debt to Equity Ratios no higher than 2 to 3
times.
Capital
• Capital refers to your net worth — the value of your
assets minus your liabilities. In simple terms, how
much you own (for example, car, real estate, cash,
and investments) minus how much you owe.
Conditions
• Conditions of a business loan are the last “C”. Sometimes
conditions are also known as loan covenants. The usual
conditions that business borrowers must follow are: providing
the lender company financial statements on a quarterly or
other periodic schedule and reporting to the lender any
material changes in the company’s financial position.
• Nearly all banks require any loans made by shareholders or
company insiders to be subordinate to their loan. Many banks
require key man life insurance on the principals of a company.
The bank may also require the company to maintain certain
financial performance ratios.
• As a potential business borrower, knowing the five “C”s that
lenders use may help you better understand how to have the
best chance of securing a business loan when you need one.
Conditions
• Another key factor in the five C’s of credit is the overall
environment that the company is operating in.
• The banker is going to assess the conditions surrounding your
company and its industry to determine the key risks facing
your company, and also, whether or not these risks are
sufficiently mitigated.
• Even if the company’s historical financial performance is
strong, the bank wants to be sure of the future viability of the
company. The bank won’t make a loan to you today if it looks
like the viability of your company is threatened by some
unmitigated risk that is not sufficiently addressed. In this
assessment, the banker is going to look to things such as the
following:
o The competitive landscape of your company - who is your competition? How do you
differentiate yourself from the competition? How does the access to capital of your
company compare to the competition and how are any risks posed by this
mitigated? Are there technological risks posed by your competition? Are you in a
commodity business? If so, what mitigates the risk of your customers going to your
competition?
Conditions
• The nature of your customer relationships – are there any
significant customer concentrations (do any of your
customers represent more than 10% of the company’s
revenues?) If so, how does the company protect these
customer relationships? What is the company doing to
diversify its revenue base? What is the longevity of
customer relationships? Are any major customers subject
to financial duress? Is the company sufficiently
capitalized to withstand a sizable write-down if they
can’t collect their receivable to a bankrupt customer?
o Supply risks – is the company subject to supply disruptions from a key supplier?
How is this risk mitigated? What is the nature of relationships with key suppliers?
o Industry issues – are there any macro-economic or political factors affecting,
or potentially affecting the company? Could the passage of pending
legislation impair the industry or company’s economics? Are there any trends
emerging among customers or suppliers that in the future will negatively
impact operations?
Conditions
• Lenders consider a number of outside
circumstances that may affect the borrower’s
financial situation and ability to repay, for example
what’s happening in the local economy. If the
borrower is a business, the lender may evaluate the
financial health of the borrower’s industry, their
local market, and competition.
Bank BRI
• http://www.bri.co.id/subpage/3
BNI
Bank Mandiri
Bank Mandiri
Kebijakan umum permohonan kredit
1. Surat permohonan fasilitas kredit.
2. Legalitas usaha.
3. NPWP dan Laporan Keuangan.
4. Hubungan dengan bank.
5. Pengalaman usaha.
6. Batas maksimum kredit bagi badan usaha.
7. Persyaratan penempatan staf BNI
atahttp://www.blogger.com/blogger.g?blogID=8604366819472339454#
editor/target=post;postID=6879892678622958295u pihak ketiga lainnya.
8. Fasilitas Forex Line.
9. Persyaratan Take Over debitur dari bank lain.
10. Referensi agungan untuk kredit yang ditake over dari bank lain Skim
pemberian fasilitas kredit dengan agunan deposito berjangka oleh divisi
korporasi atau UMN / SKM ( diambil dari beberapa sumber )
Terima Kasih

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Presentation6 credit risk (Bank Management)

  • 1. Lending principles and the business borrower Dias Satria
  • 3. 5C of credit 1. The first factor is character, which refers to a borrower's reputation. 2. Capacity measures a borrower's ability to repay a loan by comparing income against recurring debts. 3. The lender will consider any capital the borrower puts toward a potential investment, because a large contribution by the borrower will lessen the chance of default. 4. Collateral, such as property or large assets, helps to secure the loan. 5. Finally, the conditions of the loan, such as the interest rate and amount of principal, will influence the lender's desire to finance the borrower.
  • 4. 5C of credit 1. your company generates enough CASH FLOW to service the requested debt, 2. there is sufficient COLLATERAL to cover the amount of the loan as a secondary source of repayment should the company fail, 3. there is enough CAPITAL in the company to weather a storm and to ensure the owner’s commitment to the company, 4. the CONDITIONS surrounding your business do not pose any significant unmitigated risks, and 5. the owners and management of the company are of sound CHARACTER, people that can be trusted to honor their commitments in good times and bad.
  • 5. Character • Character refers to the business, its management and the shareholders who are going to guarantee the loan. • There is some subjective nature to this category and a good lender can know a potential borrower has good character without looking at credit reports. • However, credit reports and financial statements are important. • Questions that help a lender decide on the character of a business include: o does the company pay its vendors on time? o Has the business been through tough times and did they work through them or did they file bankruptcy? o Most lenders will say that they don’t want to make loans to businesses or consumers unless they are 100% confident in the potential borrower’s character. • Source: http://www.businessbankoftexas.com/banks-use-the- 5-“c”s-of-lending-to-make-business-loans.htm
  • 6. Character • When lenders evaluate character, they look at stability — for example, o how long you’ve lived at your current address, o how long you’ve been in your current job, and o whether you have a good record of paying your bills on time and in full. • If you want a loan for your business, the lender may consider your experience and track record in your business and industry to evaluate how trustworthy you are to repay.
  • 7. Capacity (cash flow) • Capacity refers to a business’ ability to take on additional debt. It is measured by looking at various financial benchmarks of a company. • The bank will make a judgment about whether a business is operating within its abilities to both financially and operationally meet all its operations.
  • 8. Capacity • Your banker needs to be certain that your business generates enough cash flow to repay the loan that you are requesting. • In order to determine this the banker will be looking at your company’s historical and projected cash flow and compare that to the company’s projected debt service requirements. • There are a variety of credit analysis metrics used by bankers to evaluate this, but a commonly used methodology is the “Debt Service Coverage Ratio”.
  • 9. Capacity • Typically the bank will look at the company’s historical ability to service the debt. This means the banker will compare the company’s past 3 years free cash flow to projected debt service, as well as the past twelve months to the extent your company is well into its fiscal year. • While projected cash flow is important as well, the banker will generally want to see that the company’s historical cash flow is sufficient to support the requested debt. • Usually projected cash flow figures are higher than historical figures due to expected growth at the company, however your banker will view the projected cash flows with skepticism as they will generally entail some level of execution risk. • To the extent that the historical cash flow is insufficient and the banker must rely on your projections, you must be prepared to defend your future cash flow projections with information that would give your banker visibility to future performance, such as backlog information.
  • 10. Capacity • Capacity refers to considering your other debts and expenses when determining your ability to repay the loan. • Creditors evaluate your debt-to-income ratio, that is, how much you owe compared to how much you earn. • The lower your ratio (debt-to-income ratio), the more confident creditors will be in your capacity to repay the money you borrow
  • 11. Collateral • Profits being generated from operations are always the first source of repayment of a business loan. • Nearly every bank loan made has collateral securing it. Even a personal guarantee from a principal shareholder is considered collateral. A lender must evaluate the collateral as a second and possibly third source of repayment if a business is unable to repay its loan. • Questions a lender must ask itself are: how much is the collateral worth if it must be liquidated? How long might it take to convert the collateral into cash for loan repayment; and is the collateral hard to find and collect (such as accounts receivable)? • Some lenders like real estate because they believe it has historically been good collateral, while others prefer quicker to collect assets like accounts receivable. Every bank has its own preference. Depending on the kind of asset, a lender may discount the value when considering its value for a loan.
  • 12. Collateral • In most cases, the bank wants the loan amount to be exceeded by the amount of the company’s collateral. The reason the bank is interested in collateral is as a secondary source of repayment of the loan. • If the company is unable to generate sufficient cash flow to repay the loan at some point in the future, the bank wants to be comfortable that it will be able to recover its loan by liquidating the collateral and using the proceeds to pay off the loan.
  • 13. Collateral • Collateral refers to any asset of a borrower (for example, a home) that a lender has a right to take ownership of and use to pay the debt if the borrower is unable to make the loan payments as agreed. • Some lenders may require a guarantee in addition to collateral. A guarantee means that another person signs a document promising to repay the loan if you can’t.
  • 14. Capital • Banks and other lenders want to see a business borrower have some “at risk” capital in a transaction. • Commercial real estate loans in Texas typically require a 10 to 25% down payment from the borrower, though it is not unusual to see real estate being refinanced at a rate of 50% loan to value. • Every transaction is treated differently and other collateral the business may be willing to pledge may enhance the transaction and the increase the amount of a loan. • Always remember though that the business loan being made must meet certain debt service coverage ratios. Simply put, a business must be able to repay their loan and still have monthly cash flow to safely operate.
  • 15. Capital • When it comes to capital, the bank is essentially looking for the owner of the company to have sufficient equity in the company. Capital is important to the bank for two reasons. • First, having sufficient equity in the company provides a cushion to withstand a blip in the company’s ability to generate cash flow. • For example, if the company were to become unprofitable for any reason, it would begin to burn through cash to fund operations. The bank is never interested in lending money to fund a company’s losses, so they want to be sure that there is enough equity in the company to weather a storm and to rehabilitate itself. • Without sufficient capital, the company could run out of cash and be forced to file for bankruptcy protection.
  • 16. Capital • Secondly, when it comes to capital, the bank is looking for the owner to have sufficient “skin in the game”. The bank wants the owner to be sufficiently invested in the company such that if things were to go wrong, the owner would be motivated to stick by the company and work with the bank during a turnaround. • If the owner were to simply hand over the keys to the business, it would clearly leave the bank fewer (and less viable) options on how to obtain repayment of the loan. • There is no precise measure or amount of “enough capital”, but rather it is specific to the situation and the owner’s financial profile. Commonly, the bank will look at the owner’s investment in the company relative to their total net worth, and they will compare the amount of the loan to the amount of equity in the company – the company’s Debt to Equity Ratio. This is a measure of the company’s total liabilities to shareholder’s equity. Banks typically like to see Debt to Equity Ratios no higher than 2 to 3 times.
  • 17. Capital • Capital refers to your net worth — the value of your assets minus your liabilities. In simple terms, how much you own (for example, car, real estate, cash, and investments) minus how much you owe.
  • 18. Conditions • Conditions of a business loan are the last “C”. Sometimes conditions are also known as loan covenants. The usual conditions that business borrowers must follow are: providing the lender company financial statements on a quarterly or other periodic schedule and reporting to the lender any material changes in the company’s financial position. • Nearly all banks require any loans made by shareholders or company insiders to be subordinate to their loan. Many banks require key man life insurance on the principals of a company. The bank may also require the company to maintain certain financial performance ratios. • As a potential business borrower, knowing the five “C”s that lenders use may help you better understand how to have the best chance of securing a business loan when you need one.
  • 19. Conditions • Another key factor in the five C’s of credit is the overall environment that the company is operating in. • The banker is going to assess the conditions surrounding your company and its industry to determine the key risks facing your company, and also, whether or not these risks are sufficiently mitigated. • Even if the company’s historical financial performance is strong, the bank wants to be sure of the future viability of the company. The bank won’t make a loan to you today if it looks like the viability of your company is threatened by some unmitigated risk that is not sufficiently addressed. In this assessment, the banker is going to look to things such as the following: o The competitive landscape of your company - who is your competition? How do you differentiate yourself from the competition? How does the access to capital of your company compare to the competition and how are any risks posed by this mitigated? Are there technological risks posed by your competition? Are you in a commodity business? If so, what mitigates the risk of your customers going to your competition?
  • 20. Conditions • The nature of your customer relationships – are there any significant customer concentrations (do any of your customers represent more than 10% of the company’s revenues?) If so, how does the company protect these customer relationships? What is the company doing to diversify its revenue base? What is the longevity of customer relationships? Are any major customers subject to financial duress? Is the company sufficiently capitalized to withstand a sizable write-down if they can’t collect their receivable to a bankrupt customer? o Supply risks – is the company subject to supply disruptions from a key supplier? How is this risk mitigated? What is the nature of relationships with key suppliers? o Industry issues – are there any macro-economic or political factors affecting, or potentially affecting the company? Could the passage of pending legislation impair the industry or company’s economics? Are there any trends emerging among customers or suppliers that in the future will negatively impact operations?
  • 21. Conditions • Lenders consider a number of outside circumstances that may affect the borrower’s financial situation and ability to repay, for example what’s happening in the local economy. If the borrower is a business, the lender may evaluate the financial health of the borrower’s industry, their local market, and competition.
  • 23. BNI
  • 26. Kebijakan umum permohonan kredit 1. Surat permohonan fasilitas kredit. 2. Legalitas usaha. 3. NPWP dan Laporan Keuangan. 4. Hubungan dengan bank. 5. Pengalaman usaha. 6. Batas maksimum kredit bagi badan usaha. 7. Persyaratan penempatan staf BNI atahttp://www.blogger.com/blogger.g?blogID=8604366819472339454# editor/target=post;postID=6879892678622958295u pihak ketiga lainnya. 8. Fasilitas Forex Line. 9. Persyaratan Take Over debitur dari bank lain. 10. Referensi agungan untuk kredit yang ditake over dari bank lain Skim pemberian fasilitas kredit dengan agunan deposito berjangka oleh divisi korporasi atau UMN / SKM ( diambil dari beberapa sumber )

Editor's Notes

  1. “Character”atau watak dari para calon peminjam merupakan salah satu pertimbangan yang terpenting dalam memutuskan pemberian kredit. Tujuannya adalah untuk memberikan keyakinan kepada pemberi kredit bahwa sifat atau watak dari orang yang akan diberikan kredit benar2 dapat dipercaya. Keyakinan ini tercermin dari latar belakang si nasabah yang bersifat latar belakang pekerjaan, pendidikan, maupun yang bersifat pribadi seperti cara hidu ataupun gaya hidup yang dianut.
  2. Penilaian terhadap capacity debitur untuk mengetahui dengan pasti sampai serumit apa kemampuan debitur menjalankan usahanya. Hal ini juga untuk melihat kemamuan calon nasabah dalam membayar kredit yang dihubungkan dengan kemampuan mengelola bisnis serta kemampuan mencari laba, sehingga terlihat kemampuannya dalam mengembalikan kredit yang disalurkan.
  3. Penilaian terhadap capacity debitur untuk mengetahui dengan pasti sampai serumit apa kemampuan debitur menjalankan usahanya. Hal ini juga untuk melihat kemamuan calon nasabah dalam membayar kredit yang dihubungkan dengan kemampuan mengelola bisnis serta kemampuan mencari laba, sehingga terlihat kemampuannya dalam mengembalikan kredit yang disalurkan.
  4. “Capital”atau modal ini menyangkut berapa banyak dan bagaimana structural modal yang telah dimiliki oleh calon peminjam.
  5. A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met. Typically, violation of a covenant may result in a default on the loan being declared, penalties being applied, or the loan being called. The proper legal term in the Loan Agreement for the loan being "called" is the "Acceleration Clause": that is, once the buyer defaults, all future payments due under the loan are "accelerated" and deemed to be due and payable immediately. [1] Covenants may also be waived, either temporarily or permanently, usually at the sole discretion of the lender. Kondisi dan situasi ekonomi perlu pula diperhatikan dalam pertimbangan pemberian kredit terutama dalam hubungannya dengan sector usaha calon peminjam. Beberapa hal yang perlu diperhatikan adalah: a.    Pemasok (Supplier) b.    Pembeli (buyer) c.    Persaingan (Competitor) d.    Barang pengganti (Substitution product) e.    Potensi dan keunggulan bersaing dibandingkan dengan pesaing (Competitive advantage) f.    Peraturan pemerintah (Government Regulation) g.    Perdagangan internasional (Macro economics) A good example for understanding Loan Covenants would be syndicate loans, where several banks act as party to loans and borrower may be one or several.