Question

What factors do you look at to consider a company a bad loan risk?

Answer 1

The factors one might look at to consider a company a bad loan risk are:

1. Bad or non-existence credit:-

For giving loan, a good credit history is indispensable. If a company does not have high credit score or has no existing credit history, one might be reluctant to provide loan.

2. Established business:-

If the business of the company is not established or not at a growing stage, it might be considered bad for giving loans. Te reason behind this is the going-concern of the business.

3. Negative cash flow:-

If a company has negative cash flows, it means there is a liquidity crunch in the company. The company has more expenses than its income. This means the company is inheriting losses and thus, makes it bad for giving loan.

4. Insufficient collateral:-

Sometimes the company do not have enough collateral security to offer to the lender or bank to secure the credit risk involve. This is an important factor that considers the company a bad loan risk.

5. Litigation:-

If the company has various ongoing litigations which might result into bankruptcy or has a verdict pending which is likely unfavorable for the company, it will be considered as a bad loan risk company.