1.1 The Decision Strategy


  • Lending money always entails some level of risk

  • The Decision Strategy is a tool, not a formula

  • The Decision Strategy is a logical and systematic approach to analyzing credit opportunities

  • It’s design to improve efficiency and yield more reliable assessments


Guiding questions to identify risk

  1. What kind of business am I dealing with?

  2. Is it a viable business?

  3. What specific borrowing needs exist that I might be able to satisfy?

  4. Will the business be able to repay the loan on time without jeopardizing its financial stability?

  5. What can I do to decrease the risk of this loan?


Five Stages of the Decision Strategy


Opportunity Assessment

  • This includes prospecting, business development, and identifying lending opportunities


Preliminary Analysis

  • The lender asks 1) What is the loan purpose and 2) Why does this company need to borrow money?


Repayment Source Analysis

  • Identify trends that could influence the company’s ability to repay and discover major risks in the loan situation

  • Study the industry, business, management, financial history, cash flow, and future projection


Loan Packaging

  • Use the results of preliminary loan analysis and the repayment source analysis to make an informed decision about whether and under what conditions the loan should be granted


Loan Management

  • The loan must be administered to ensure complete and timely repayment of principal and interest


Loan Management

  1. Administer the loan properly


5 C’s of Credit

There are more than 5 cs, but different banks use different Cs

  • Character (Reputation, integrity, experience, track record, past payment history, willingness to repay, management experience)

  • Credit (Credit history, business sand personal credit ratings, quality of and ability to verify an explanation for past credit issues)

  • Capacity (Debt service coverage, past payment history, ability to repay, evidence of ability to support this loan in addition to other business and personal debt)

  • Cash Flow (Debt service coverage, ability to repay from operational cash flow, amount and reliability of primary repayment source)

  • Conditions (Conditions facing the borrower, the industry, and the economy in addition to those of the loan-interest rate, term, and covenants)

  • Capital (Resources available to the owners, net worth of owners, net worth of the business, how much the owners have invested in the business, and in the case of a purchase loan, the amount the borrower is willing to contribute to the purchase.)

  • Collateral (Security of the debt, secondary repayment source, availability of guarantees, support for guarantees.)