Liquidity and credit management

Exams bullet points

INTRODUCTION

The development of the business world today is quite tight; it is seen by a growing number
of companies in the same sector of business. One goal of the company is to maintain the
viability of the company as well as trying to develop more business in the future to achieve
maximum profit and minimum loss. One services company face tight competition in the
banking sector is credit.

In social life, credit is not a strange anymore. This is because people in general need of funds
to meet their needs, both to conduct its business and to meet the ever increasing
consumption, whereas a human's ability to have certain limitations that force a person to
obtain funds for the fulfilment of their needs.

Financial support is better known to the public as a credit. According to Sunarti (2008:81) “
the main source of credit bank from lending activities”. In addition, credit is happening is a
capital investment that has substantial risks, such as delays in repayment of loans, and the
collectability of loans either partially or wholly within the allotted time.

Therefore, people need a credit management of loans that can achieve the desired results
and objectives. Credit management in a bank is an important thing to do so that loans going
well and minimize the things that might happen beyond calculation.

According to Firdausi (2004:4) credit management is important to learn and implement,

because of: 1. Loans disbursed by the bank are the biggest part of the assets owned by the
bank.

2. Revenues from loan interest income are the largest source of revenue for banks. If the
loan goes well then the interest rate can reach 70% to 90% of total bank revenues.

3. If the credit is less well managed it will be a lot of non-performing loans, which resulted in
lower interest income and the bank would suffer losses.

4. If managed properly so that the credit problem loans amount of bit, so that acceptance
of bank rates increasing and growing well.

LITERATURE VIEW

LIQUIDITY MANAGEMENT

Liquidity According to Taswan (2010:246) Liquidity is the ability of the company to meet
its obligations that must be paid. Meanwhile, according to Kuncoro (2002:279) defines
liquidity are”The ability of bank management to provide sufficient funds to meet all its
 obligations and commitments that have been issued to the customer any time.
Obligations hand assets, such as providing funding for an approved loan drawdown or
withdrawal of the appeal leeway loan. While the obligations arising from the liabilities
side as the provision of funds for withdrawal of savings and other deposits by
customers.”

CREDIT MANAGEMENT

Credit comes from credere or creditum which means trust. Because it's basic lending is
lack of trust. The meaning of the word implies that any crediting activity must be based
on trust. Without trust there will be no credit or otherwise not agree to prospective
customer’s credit, because lending by banks has economic value to individual customers
or business entity. The economic value that would be obtained debtor and creditor
(bank) should be agreed at the outset (no commitment) without prejudice to either
party. The economic value of the same credit will be returned to the lender after a
period of time in accordance with the agreement

TYPES OF LIQUIDITY

Cash Balance in account

This is the highest form of liquidity but which earns no interest for the simple reason that it
is not a deposit kept for a specific period. On an average, companies maintain at least five
percent of their total assets as cash balance. But this percentage depends upon the nature
of business. If the nature of business is cash oriented, some companies may even maintain
up to twenty percent of their total assets as cash balance in account. Examples of such
companies are trading and financial enterprises, whose business itself is dealing with cash.
Manufacturing companies also require more cash especially if their operating cycle is more.
Generally, service-oriented companies require fewer amounts of cash.

Overdraft arrangement with Banks

This type of facility is available for businesses with current account. The amounts lying idle
in current account do not earn any interest. Upon negotiation with the bank and depending
upon the business credentials, �overdraft limit� is fixed by the banks. At any point of
time, the business or company cannot borrow or make payment above the fixed limit.
Moreover, the overdraft availed is repayable on demand by the bank. In some cases,
depending upon the size of the overdraft facility, banks may require companies to keep a
security against it.

Marketable Securities

Marketable securities are short-term investment instruments to obtain a return on

temporarily idle funds. The basic characteristics of marketable securities affect the degree
of their liquidity or marketability. To be liquid, a security must have two basic
characteristics: a ready market and safety of principal. Ready marketability minimizes the
amount of time required to convert a security into cash. The second determinant of liquidity
is that there should be little or no loss in the value of marketable security overtime. Only
those securities that can be easily converted into cash without any reduction in the principal
amount qualify for short-term investments. So, they earn a lower return as the fear of losing
the principal is very less. For selecting a proper marketable security, the financial manager
should consider the following factors:Financial/default risk, Interest rate risk, Taxability,
Liquidity,Yield etc.

Treasury bills, units, bankers' acceptances etc., are common forms of marketable securities.

Factoring

Factoring is a method of using receivables for financing. In this case, the accounts
receivables serve as security for the financing made by the bank/factor. Factoring is the
outright sale of accounts receivable to a bank or finance company without recourse. The
advantages of factoring in this context are that it offers immediate cash and thus helps in
liquidity and it allows for receipt of advances as required on a seasonal basis and it
strengthens the company�s balance sheet position.

Inter-Company Deposits

They are short-term deposits with other companies and are a fairly attractive form of
investment of short-term funds in terms of rate of return. But these kinds of deposits
generally require a month's time for conversion into cash and hence have to be planned in
advance for meeting any short-term obligation.

Money Market Mutual Funds / Liquid funds

Though these come under marketable securities, they can be considered and dealt with
separately, being highly liquid. Money market mutual funds are professionally managed
portfolios of marketable securities, which provide instant liquidity. These funds have
achieved significant growth due to their competitive yields and high liquidity.

What Is Liquidity Risk?

Liquidity is a term used to refer to how easily an asset or security can be bought or sold in
the market. It basically describes how quickly something can be converted to cash. There
are two different types of liquidity risk. The first is funding liquidity or cash flow risk, while
the second is market liquidity risk, also referred to as asset/product risk.

Types of liquidity risk

Funding Liquidity Risk

Funding or cash flow liquidity risk is the chief concern of a corporate treasurer who asks
whether the firm can fund its liabilities. A classic indicator of funding liquidity risk is
the current ratio (current assets/current liabilities) or, for that matter, the quick ratio. A line
of credit would be a classic mitigant.

Market Liquidity Risk

Market or asset liquidity risk is asset illiquidity. This is the inability to easily exit a position.
For example, we may own real estate but, owing to bad market conditions, it can only be
sold imminently at a fire sale price. The asset surely has value, but as buyers have
temporarily evaporated, the value cannot be realized.

Credit Creation

Credit creation separates a bank from other financial institutions. In simple terms, credit
creation is the expansion of deposits. And, banks can expand their demand deposits as a
multiple of their cash reserves because demand deposits serve as the principal medium of
exchange. In this article, we will talk about credit creation.

Demand deposits are an important constituent of money supply and the expansion of demand
deposits means the expansion of money supply. The entire structure of banking is based on
credit. Credit basically means getting the purchasing power now and promising to pay at some
time in the future. Bank credit means bank loans and advances.

A bank keeps a certain part of its deposits as a minimum reserve to meet the demands of its
depositors and lends out the remaining to earn income. The loan is credited to the account of
the borrower. Every bank loan creates an equivalent deposit in the bank. Therefore, credit
creation means expansion of bank deposits.

The two most important aspects of credit creation are:

1. Liquidity – The bank must pay cash to its depositors when they exercise their right to
demand cash against their deposits.

2. Profitability – Banks are profit-driven enterprises. Therefore, a bank must grant loans in
a manner which earns higher interest than what it pays on its deposits.

The bank’s credit creation process is based on the assumption that during any time interval,
only a fraction of its customers genuinely need cash. Also, the bank assumes that all its
customers would not turn up demanding cash against their deposits at one point in time.

Basic Concepts of Credit Creation process

Bank as a business institution – Bank is a business institution which tries to maximize profits
through loans and advances from the deposits.

Bank Deposits – Bank deposits form the basis for credit creation and are of two types:

Primary Deposits – A bank accepts cash from the customer and opens a deposit in his name.
This is a primary deposit. This does not mean credit creation. These deposits simply convert
currency money into deposit money. However, these deposits form the basis for the creation
of credit.

Secondary or Derivative Deposits – A bank grants loans and advances and instead of giving
cash to the borrower, opens a deposit account in his name. This is the secondary or
derivative deposit. Every loan crates a deposit. The creation of a derivative deposit means
the creation of credit.

Cash Reserve Ratio (CRR) – Banks know that all depositors will not withdraw all deposits at
the same time. Therefore, they keep a fraction of the total deposits for meeting the cash
demand of the depositors and lend the remaining excess deposits. CRR is the percentage of
total deposits which the banks must hold in cash reserves for meeting the depositors’
demand for cash.

Excess Reserves – The reserves over and above the cash reserves are the excess reserves.
These reserves are used for loans and credit creation.

Credit Multiplier – Given a certain amount of cash, a bank can create multiple times credit. In
the process of multiple credit creation, the total amount of derivative deposits that a bank
creates is a multiple of the initial cash reserves.

Credit creation by a single bank

There are two ways of analysing the credit creation process:

a. Credit creation by a single bank

b. Credit creation by the banking system as a whole

In a single bank system, one bank operates all the cash deposits and cheques. The process of
creating credit is explained with the hypothetical example below:

Credit creation by single bank

 Rounds Primary deposits Cash reserves Credit creation or derivatives
deposit
(Le =20%)

1.(person A) Le.1,000,000 Le.200,000 Le.800,000

(Initial primary (Initial excess reserves)

deposits)

2.(Person B) 800,000 160,000 640,000

3.(Person C) 640,000 128,000 512,000

4.(Person D) 512,000 102,000 410,000

Total 500,000 100,000 400,000

Let’s assume that the bank requires maintaining a CRR of 20 percent.

 If a person (person A) deposits le 1,000,000 with the bank, then the bank keeps only le
200,000 in the cash reserve and lends the remaining 800,000 to another person (person
B). They open a credit account in the borrower’s name for the same.

 Similarly, the bank keeps 20 percent of le 800,000 (i.e. le 160,000) and advances the
remaining le 640,000 to person C.

 Further, the bank keeps 20 percent of le 640,000 (i.e.le 128,000) and advances the
remaining le 512,000 to person D.
This process continues until the initial primary deposit of le 1,000,000 and the initial additional
reserves of le 800,000 lead to additional or derivative deposits of le 400,000
(800,000+640,000+512,000+….).

Adding the initial deposits, we get total deposits of le500,000. In this case, the credit multiplier
is 5 (reciprocal of the CRR) and the credit creation is five times the initial excess reserves of le
800,000.

Limitations of Credit Creation

While banks would prefer an unlimited capacity for creating credit to increase profits, there are
many limitations. These limitations make the process of creating credit non-profitable.
Therefore, a bank continues to create additional credit as long as:

 There is a negligible chance of the loans turning into bad debts

 The interest rate that banks charge on loans and advances is greater than the interest
that the bank gives to depositors for the money deposited in the bank.
Hence, we can say that the limitations of credit creation operate through shifts in the balance
between liquidity and profitability. The factors that affect the creation of credit are:

 The capacity of banks to create credit.

 The willingness of the banks to create credit

 Also, the demand for credit in the market.

Capacity to create credit is a matter of:

 The availability of cash deposits with banks

 The factors which determine their cash deposit ratio

As regards the demand for credit:

 The demand must exist in the market

 Creditworthy borrowers (to avoid bad debts)

 The amount of loan granted should not exceed the paying capacity of the borrower
Leakages

 If the banks are unwilling to utilize their surplus funds for granting loans, then the
economy is headed towards recession

 If the public withdraws cash and holds it with themselves, then it reduces the bank’s
power to create credit

FINANCIAL RISK

Financial Risk as the term suggests is the risk that involves financial loss to firms.
Financial risk generally arises due to instability and losses in the financial market caused
by movements in stock prices, currencies, interest rates and more.

Types of Financial Risks:

Financial risk is one of the high-priority risk types for every business. Financial risk is caused
due to market movements and market movements can include a host of factors. Based on
this, financial risk can be classified into various types such as Market Risk, Credit Risk,
Liquidity Risk, Operational Risk, and Legal Risk.

Market Risk:

This type of risk arises due to the movement in prices of financial instrument. Market risk
can be classified as Directional Risk and Non-Directional Risk. Directional risk is caused
due to movement in stock price, interest rates and more. Non-Directional risk, on the
other hand, can be volatility risks.

Credit Risk:

This type of risk arises when one fails to fulfill their obligations towards their
counterparties. Credit risk can be classified into Sovereign Risk and Settlement Risk.
Sovereign risk usually arises due to difficult foreign exchange policies. Settlement risk, on
the other hand, arises when one party makes the payment while the other party fails to
fulfill the obligations.

Liquidity Risk:

This type of risk arises out of an inability to execute transactions. Liquidity risk can be
classified into Asset Liquidity Risk and Funding Liquidity Risk. Asset Liquidity risk arises
either due to insufficient buyers or insufficient sellers against sell orders and buys orders
respectively.

Operational Risk:
 This type of risk arises out of operational failures such as mismanagement or technical
failures. Operational risk can be classified into Fraud Risk and Model Risk. Fraud risk
arises due to the lack of controls and Model risk arises due to incorrect model
application.

Legal Risk:

This type of financial risk arises out of legal constraints such as lawsuits. Whenever a
company needs to face financial losses out of legal proceedings, it is a legal risk.

CREATIVE ACCOUNTING OR WINDOW DRESSING

Some companies try to manipulate financial information, in order to make the financial
disclosures look more attractive to the stakeholders. This set of activities is called window
dressing. Window dressing is mostly done at the end a financial term, but can be
undertaken at any point during the year. This technique is mostly employed by companies
and mutual funds.

The main purpose of window dressing involves making the performance and liquidity
position of the firm look healthier and appealing. Financial statement such as Income
Statement, Balance Sheet and cash flow statement are the three main company generated
document that can be used to assess the performance of a company. Hence, window
dressing involves manipulating these statements before they are released to the
stakeholders to review and evaluate.

How is it done?

There are several ways through which a company can window dress it financial statement.
One of the most popular techniques is changing asset deprecation, by using a different
deprecation method. Short-term borrowing, engaging in sales and leaseback transaction
near the end of year can substantial impact the outlook of the company’s financials, since it
embellishes company’s financial result and liquidity position.

Another form of window dressing involves advertising and creative marketing, which entails
exaggeration of company’s product and service, while the negative attributes are kept
hidden, in order to boost sales under false pretences.

Financial institutions often sell underperforming stock, and replace them with well-
performing stock in the last few days of the financial year, which leads to better position in
the balance sheet, hence making the investing with that particular bank or mutual fund
more appealing for he clients.

Window dressing is usually beneficial to managers, since their remuneration depends on

how well their company performs, while some times managers want to please the banks
with a better liquidity position in order to acquire loans.
Some companies window dress their financial accounts in order to reduce their tax liability,
as lower income would entail lower taxes. During mergers and acquisitions, firms often over
overstate their asset so that a higher value could be places on the company.

Unethical and Misleading

Window dressing in considered unethical and even illegal in most countries, since it distorts
the information, which misleads the stakeholders. In order to stop companies from
manipulating their financial statement, accounting standards have been developed, which
make it necessary for all companies to record financial transaction in a specific manner,
hence leaving no room for creative accounting. Examples of window dressing in accounting
•Cash: Postpone paying suppliers, so that the period-end cash balance appears higher than
it should be. •Accounts receivable: Record an unusually low bad debt expense, so that the
accounts receivable (and therefore the current ratio) look better than is really the case.
•Revenue: Offer customers an early shipment discount, thereby accelerating revenues from
a future period into the current period. •Expenses: Withhold supplier expenses, so that they
are recorded in a later period.

PORTER’S FIVE FORCES

A graphical representation of Porter's five forces

Porter's Five Forces Framework is a method for analyzing competition of a business. It draws
from industrial organization (IO) economics to derive five forces that determine the
competitive intensity and, therefore, the attractiveness (or lack of it) of an industry in terms
of its profitability. An "unattractive" industry is one in which the effect of these five forces
reduces overall profitability. The most unattractive industry would be one approaching
"pure competition", in which available profits for all firms are driven to normal profit levels.
The five-force perspective is associated with its originator, Michael E. Porter of Harvard
University. This framework was first published in Harvard Business Review in 1979.
Porter refers to these forces as the microenvironment, to contrast it with the more general
term microenvironment. They consist of those forces close to a company that affect its
ability to serve its customers and make a profit. A change in any of the forces normally
requires a business unit to re-assess the marketplace given the overall change in industry
information.
 Contents

Five Forces

Threat of new entrants

Threat of substitutes

Bargaining power of customers

Bargaining power of suppliers

Competitive rivalry
1* Threat of new entrants
Profitable industries that yield high returns will attract new entities. New entrants
eventually will decrease profitability for other firms in the industry. Unless the entry of new
firms can be made more difficult by incumbents, abnormal profitability will fall towards zero
(perfect competition), which is the minimum level of profitability required to keep an
industry in business.
The following factors can have an effect on how much of a threat new entrants may pose:
The existence of barriers to entry (patents, rights, etc.). The most attractive segment is one
in which entry barriers are high and exit barriers are low. It's worth noting, however, that
high barriers to entry almost always make exit more difficult.

 Government policy such as sanctioned monopolies, legal franchise requirements,

or regulatory requirements.
 Capital requirements - clearly the Internet has influenced this factor dramatically. Web
sites and apps can be launched cheaply and easily as opposed to the brick and mortar
industries of the past.
 Absolute cost
 Cost advantage independent of size
 Economies of scale
 Product differentiation
 Brand equity
 Switching costs are well illustrated by structural market characteristics such as supply
chain integration but also can be created by firms. Airline frequent flyer programs are an
example.
 Expected retaliation - For example, specific characteristics of oligopoly markets is that
prices generally settle at equilibrium because any price rises or cuts are easily matched
by the competition.
 Access to distribution channels
 Customer loyalty to established brands. This can be accompanied by large brand
advertising expenditures or similar mechanisms of maintained brand equity.
 Industry profitability (the more profitable the industry, the more attractive it will be to
new competitors)

2* Threat of substitutes
A substitute product uses a different technology to try to solve the same economic need.
Examples of substitutes are meat, poultry, and fish; landlines and cellular telephones;
airlines, automobiles, trains, and ships; beer and wine; and so on. For example, tap water is
a substitute for Coke, but Pepsi is a product that uses the same technology (albeit different
ingredients) to compete head-to-head with Coke, so it is not a substitute. Increased
marketing for drinking tap water might "shrink the pie" for both Coke and Pepsi, whereas
increased Pepsi advertising would likely "grow the pie" (increase consumption of all soft
drinks), while giving Pepsi a larger market share at Coke's expense.
Potential factors:

 Buyer propensity to substitute. This aspect incorporated both tangible and intangible
factors. Brand loyalty can be very important as in the Coke and Pepsi example above;
however contractual and legal barriers are also effective.
 Relative price performance of substitute
 Buyer's switching costs. This factor is well illustrated by the mobility industry. Uber and
its many competitors took advantage of the incumbent taxi industry's dependence on
legal barriers to entry and when those fell away, it was trivial for customers to switch.
There were no costs as every transaction was atomic, with no incentive for customers
not to try another product.
 Perceived level of product differentiation which is classic Michael Porter in the sense
that there are only two basic mechanisms for competition - lowest price or
differentiation. Developing multiple products for niche markets is one way to mitigate
this factor.
 Number of substitute products available in the market
 Ease of substitution
 Availability of close substitute

3* Bargaining power of customers

The bargaining power of customers is also described as the market of outputs: the ability of
customers to put the firm under pressure, which also affects the customer's sensitivity to
price changes. Firms can take measures to reduce buyer power, such as implementing a
loyalty program. Buyers' power is high if buyers have many alternatives. It is low if they have
few choices.
Potential factors:

 Buyer concentration to firm concentration ratio

 Degree of dependency upon existing channels of distribution
 Bargaining leverage, particularly in industries with high fixed costs
 Buyer switching costs
 Buyer information availability
 Availability of existing substitute products
 Buyer price sensitivity
 Differential advantage (uniqueness) of industry products
 RFM (customer value) Analysis

4* Bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw
materials, components, labor, and services (such as expertise) to the firm can be a source of
power over the firm when there are few substitutes. If you are making biscuits and there is
only one person who sells flour, you have no alternative but to buy it from them. Suppliers
may refuse to work with the firm or charge excessively high prices for unique resources.
Potential factors are:

 Supplier switching costs relative to firm switching costs

 Degree of differentiation of inputs
 Impact of inputs on cost and differentiation
 Presence of substitute inputs
 Strength of distribution channel
 Supplier concentration to firm concentration ratio
 Employee solidarity (e.g. labor unions)
 Supplier competition: the ability to forward vertically integrate and cut out the buyer.

5* Competitive rivalry
For most industries the intensity of competitive rivalry is the major determinant of the
competitiveness of the industry. Having an understanding of industry rivals is vital to
successfully marketing a product. Positioning pertains to how the public perceives a product
and distinguishes it from competitors‘. An organization must be aware of its competitors'
marketing strategies and pricing and also be reactive to any changes made.
Potential factors:

 Sustainable competitive advantage through innovation

 Competition between online and offline organizations
 Level of advertising expense
 Powerful competitive strategy which could potentially be realized by adhering to
Porter‘s work on low cost versus differentiation.
There are several types of security interests which can be adopted by banks or lenders
depending upon the collateral involved and the circumstances. Different forms of creating
charge on assets can be described below:

PLEDGE
Pledge is commonly used for goods or securities such as gold, stocks, certificates etc. The
lender (pledgee) holds the actual possession of such securities till the time the borrower
(pledger) has the borrowed amount with him. Once the borrowed amount has been
returned, the securities are returned as well. If the pledger defaults on the loan amount, the
pledgee can sell off the goods pledged with him as security in order to recover the principal
and the interest amount. In this case risk of lending comparatively reduces because
possession of asset is with lender.

HYPOTHECATION
Hypothecation is usually when the charge is on movable assets rather than having charge
on fixed assets. However, hypothecation is different from pledge in the sense that the
possession of such movable security stays with the borrower. Hence, in an event of default,
the lender is first required to take the possession / seize of such property or asset in order
to recover the principal and interest. Example of hypothecation is vehicle financing where
the lender has the asset that has been hypothecated against the loan with a bank. If the
borrower defaults, the bank then takes the possession of the vehicle, after sufficient notice,
in order to recover the money.

LIEN
Under a lien, the lender gets the right to hold up a property or machinery used as collateral
against funds borrowed. However, unless the contract states otherwise, the lender doesn’t
have the right to sell of the property or the asset, if the borrower defaults on the loan.
Examples of lien include rent receivable, unpaid fees etc. It is a right given to the creditor to
retain/possess the security until the loan amount is discharged. Since possession is with the
creditor, it is the strongest form of security. Lien can be on both movable and immovable
property. But generally, lending companies choose to have mortgage on immovable
property and lien on movable security like shares, gold, deposits etc.

MORTGAGE
Under a mortgage, the legal ownership of the asset can be transferred to the lender if the
borrower defaults on the loan amount. However, the borrower continues to remain in the
possession of the property. Mortgage is usually used for immovable assets (example: house,
land, building or any property which is permanently fixed to the earth or attached to the
land). Home loans classify as mortgage.

ASSIGNMENT
Assignment is another type of charge on current assets or fixed assets. Under assignment,
the charge is created on the assets held in the books. It is another mode of providing
security against borrowing. Examples of assignment include life insurance policies, book of
debts, receivables, etc. which can be financed by the bank. For example – A bank can
finance against the book debts. In such a case, the borrower assigns the book debts to the
bank.

Banks look at these 5 C's to help determine the creditworthiness of the business that's
asking for financing. How does your business stack up?

Capacity

Collateral is any property that can be used as security for the loan. This gives the lender
assurance that if you do default on your obligations under the loan, there is an asset of
sufficient value that can be re-possessed by the lender to cover the outstanding debt.
Capacity refers to the borrower’s ability to repay the loan. Lenders usually determine this by
looking at your employment history, income and financial obligations. These are essential
indicators in determining whether you will be able to repay your proposed loan as well as
maintain your existing financial commitments. Factors that will be considered include
employment stability, income amount, and type of income (e.g. full time, part time, casual,
shift work).

Capital

Lenders take the view that the larger the contribution you put towards the proposed
purchase from your own saved funds, the less the likelihood of default. In addition, a larger
deposit means that the loan is smaller in comparison to the value of the security property,
which means that in circumstances where you do default, the value of the security is going
to exceed the value of the outstanding loan.

Collateral

Accounts receivable, inventory, cash, equipment and commercial real estate are all forms of
collateral that banks leverage to secure loans. In addition to looking at the value of your
collateral, the bank will consider any existing debt you may still owe on that collateral.

Conditions

The state of the economy, trends in your industry and pending legislation relative to your
business are all conditions that are considered by banks. These types of factors—often out
of your control—may affect your ability to make payments. Conditions refer to your
financial conditions that exist at the time that you submit your application. This may include
general market conditions, your interest rate and principal amount. These conditions act as
indicators of any outside situations that may affect your ability to repay your loan later
down the track.

Character

Work experience, experience in your industry and personal credit history are all character
traits banks will consider. Your personal integrity and good standing—and the integrity and
standing of those closely tied to the success of the business—are critically important. When
lenders assess character, they are looking at your credit history and whether you have a
good record of paying your bills in full and on time. A prospective lender will obtain (with
your authority) a credit report from one of the major credit agencies which will provide
information regarding your past debts, your conduct on those debts and whether you have
been subject to any previous defaults or bankruptcies. Lenders use this information to
evaluate how your likelihood of repaying the loan in full.

PREPARED BY: EDWIN NYAMOH.

Materials from different sources.

Advice: all students are advice to read more………….