Business — Banking — Management — Marketing & Sales

Analysis of business risk as a way to assess the creditworthiness of the customer

Category: Risk Management in Banking

Business risk — the risk associated with that cycle funds the borrower may not be completed on time and with prospective effect. Business risk factors are different causes that lead to continuity or delay cycle funds in separate stages. Business risk factors can be grouped by stage of the circuit.

Stage I — establishment of reserves:

number of suppliers and their reliability;

capacity and quality of storage facilities;

appropriate means of transportation nature of the goods;

availability of raw material prices and transportation for the borrower;

number of intermediaries between buyers and manufacturers of raw materials and other tangible assets;

distance provider;

economic factors;

Fashion at the purchased raw materials and other valuables;

exchange rate risks;

risk of entry restrictions on exports and imports of imported raw materials.

Stage II — the stage production:

availability and qualifications of the workforce;

age and power equipment;

load of equipment;

state of industrial premises.

Stage III — the stage of marketing:

number of buyers and their ability to pay;

diversification of debtors;

degree of protection against non-payment buyers;

belonging to the borrower’s primary sector credited by the nature of the finished product;

the degree of competition in the industry;

impact on the price of finished goods credited social traditions and preferences, the political situation;

there is a problem of overproduction in the market of the product;

demographic factors;

exchange rate risks;

• Ability to provide restrictions on the export of and import into another country of production.

Moreover, risk factors at the stage of marketing can be combined with the factors of the first and second stage. Therefore, business risks at the stage of sales is higher than at the stage of establishing reserves or production.

In terms of economic instability analysis of business risk at the time the loan substantially complements the assessment of creditworthiness of the customer based on financial ratios that are calculated on the basis of secondary evidence of elapsed periods.

These factors of business risk must be taken into account in developing standard forms of bank loan applications, feasibility studies for the possibility of issuing a loan-

Assessment of business risk commercial bank could be formalized and carried out by a system of scoring, when every factor of the business risk is assessed in points (Table 9.3).

Table. Criteria of business risk


I Number of suppliers

more than three






II. Reliability of suppliers

all suppliers have an excellent reputation


most reliable suppliers as business partners


bulk suppliers are unreliable


III. Cargo transportation

within the city limits, there is an insurance policy,

form of transportation conformity of the goods


provider remote from the buyer, there is an insurance policy,

Transportation conformity of the goods


provider remote from the buyer, transportation may

lead to a loss of product and reduce its quality

there is an insurance policy


supplier within the city, transportation does not meet the

cargo insurance policy is missing, etc.


IV. Storage of goods

the borrower has its own warehouse

satisfactory quality or warehouses

not required


warehouse leased


storage space required, but not at the moment

assessment of business risk



A similar model assessment of business risk and apply on the basis of other criteria. Points are tabulated for each criterion and summed. The greater the total score, the less risk and more likely the deal with the projected effect, allowing the borrower to repay term debt obligations.

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