Question

Hotels and other companies extend credit to other businesses if certain conditions are met. Under what conditions would you give credit to a company? Is it ever worth lowering these standards? Why or why not?

Answer 1

Any merchant bank, credit institution or retail bank lends money by making sure to check away the below points as highlighted:

1. Checking on how quickly the company is capable to pay off the debt obligations.
2. Checking on credit dependency and calculating the balance in between used cash over the credit in percentiles.
3. Checking on Free Cash flows over equity and other funds, basically money after paying off interest and tax.
4. Checking on failed projects and pending debt payments.
5. Checking over the Working Capital requirements and ability to pay off short term legal obligations within a sensible time.
6. Checking on the history of late payments and defaulting over the loans.

Lowering standards while granting loan could possibly lead to more credit defaults and NPA ratio would come down for any bank that lends the money for business purposes. There should be some measures and precautions while granting the loans and debts which could prevent the entire debt default scenarios. Above check list could possibly waive a bank off from facing such default risk's involved while lending to any credit extensions to any businesses.