Credit Analyst Interview Question
Hi everyone, need some advice on an interview question. If the interviewer asked "if company A came to you and asked for a loan of $10k, how would you determine whether or not you would lend to them?" how would you answer this?
.
Revenues - recurring component, if any long standing client relationships, contracted revenues if applicable
Costs - what’s FC/VC structure, how costs scale with revenues, hedge against inflation - pass through to customers, fixed pricing contracts, etc.
EBITDA - if margins increase over time in case it’s not already a mature company, if margins are defensible
Capex - Maintenance/Fixed Capex split
Assets - What rights/claims do you as a lender have in case of bankruptcy/liquidation/restructuring
Structure - How close are you to the OpCo in case financing is at some other level: structural subordination details
Documentation - Details on contractual subordination or otherwise in the lending structure in case there are multiple levels of debt
If you are applying for a role in a traditional commercial credit training program, here's an alternative, more simple answer using the 5 Cs of Credit:
1) Character: What's the company and company owner's (if privately held) reputation? Does the company have a history of paying back its loans? Has it or any of its owner(s) declared bankruptcy? I'd Google the company, check the news and run a legal search.
2) Cash Flow: Is the company cash flow positive? Let's assume it's a $10K line of credit at Prime + 1.00%. Can the company's cash flow handle the interest expense? If you want to assume it's a term loan, can they handle the debt service with 1.20x or more coverage?
3) Capacity: Assuming it is a line of credit for working capital, the rule of thumb for a generic bank loan is 10% - 30% of revenues. If they want a $10K loan, you would like to see minimum $35K (rough estimate) of revenue. You would also want to see that they have net worth such that they will have a reasonable debt to equity ratio. So, for example, you want to see net worth of $20K or more.
4) Collateral: What kind of collateral can this company offer? I would look for collateral worth slightly more than $10K if it's good, easily saleable collateral; and worth significantly more if it's going to be tough to liquidate.
5) Conditions: What are the economic headwinds and tailwinds in the company's industry?
Similique consequatur quasi aspernatur qui odio error. Sit dolores sit in sint ipsam iste qui dolorem. Provident dolorem enim nihil et. Dolorem recusandae rerum eos quibusdam dolor quia nisi.
Numquam et aut voluptatibus nihil sed. Quis error distinctio qui libero consectetur quia.
Quis et temporibus nobis ut dolor. Vel aspernatur reiciendis velit ut dolorum exercitationem beatae. Cupiditate temporibus tempore voluptas culpa suscipit. Corporis quis distinctio harum hic minima. Aut quia quasi culpa quidem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...