Credit Evaluation

Credit Evaluation

Credit Evaluation

Credit evaluation refers to the process borrowers are subjected to for them to be eligible for funding or to pay for products within a specified period. It also refers to the steps lenders undertake while examining the credit request.

Loan approval primarily depends on the two parties, the lenders and the borrowers. For instance, the lender must be willing to offer credit after assessing the capacity of the borrower to obey the obligation fully.

On the other hand, the borrowers must demonstrate the willingness and the ability to repay the principal amount and the interest within the agreed period. In general, small business is required to seek approval in order to qualify for credit.

When lenders approve a loan application and give funds, they are often convinced and have total confidence in the creditworthiness of the respective borrowers.

We talk of creditworthiness; we refer to the borrowers’ capacity as well as the willingness to repay the borrowed money.

There are several tools used in the evaluation of credit.

In case the borrower is the business, the lenders focus more on the statement of financial position and income statements, the rate of stock turnover, the efficiency of the management, debt structure, and the prevailing marketing conditions.

In general, lenders prefer dealing with borrowers with positive cash flows and net earnings that meet any likely debt obligation.

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