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Credit AnalysisCredit analysis should be approached systematically. At a minimum, your credit analysis should have three years of historical financial data that is accrual adjusted for the credit analysis. Care must be taken not to focus on just one ratio or measure, but to look at them in comparison with each other. Like a basketball team, if one player or area is weak, it is complemented by the other’s strengths. For example, low equity may have to be offset by high profits and financial efficiency in the credit analysis.A credit analysis "Time-Saver Worksheet" is a useful information management tool that can perform as a checklist of key data variables from the balance sheet that can allow you to calculate any one of the ratios and measures proposed by the Farm Financial Standards Council. In your credit analysis of the balance sheet, total farm assets, liabilities, and equity or net worth are needed along with current assets and liabilities. From the income or operating statement, gross farm revenue and total farm expense, which equates to net farm income, is required in your credit analysis. Interest paid, any capital lease expense not accounted for in farm expenses, and depreciation expense data are also necessary in your credit analysis. Other pertinent information includes gross non-farm earnings, estimation of family living expenses, income, social security and any self-employment taxes, and total principal and interest payments including interest on operating capital needs for the year in your credit analysis. The reason to have three years of data in your credit analysis is so you can get a more valid trend analysis. If you are using tax information, three to five years may be necessary, which should be accrual adjusted using balance sheet and tax strategy information as a key part of the credit analysis. Any guidelines and yardsticks used in your credit analysis should be based upon academic research and field experience in real-world credit analysis. Think of these in terms of a traffic light. A green light would represent low risk while a yellow light would indicate moderate risk. A red light would then be high risk, although not necessarily a sure sign of failure. The ratios and measures applied in your credit analysis can be slightly modified at your discretion for ease of application. Also, ratios only identify symptoms. Problems and strategies to overcome are the work of both the borrower and the lender. Credit analysis is critical on large loans or ones that are making major expansions or changes in the business. Web Equity Manager® calculates a complete financial analysis on any loan type, from the simplest loan requests to the most complex agricultural and related small business credits utilizing the Farm Financial Standards Ratios and RMA Industry Comparisons. Credit bureau reports can be pulled from within the Web Equity Manager® system and lenders can include that information in their scoring and rating parameters. Web Equity Manager® also provides the Fair, Isaac LiquidCredit® analytic and decisioning service for small business lending, including the industry-leading Small Business Scoring ModelsSM (SBSSSM) functionality so lenders can quickly and confidently process loans up to $250,000 with little or no financial data. Click on the link below (or call ECI) to schedule a live online demonstration of Web Equity Manager® financial analysis capabilities today. 1-800-264-0787 ext. 200 | ECI Home Page Here ©
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