CREDIT WORTHINESS

Firm's Credit Worthiness

Firm's Credit Worthiness

Introduction

The study is related to the credit worthiness of the firms that are important for the Safe credit. Safe credit is the company that provides loans to the firms which are not necessarily sufficiently large to have a credit rating from one of the large credit rating agencies. There fore, it is important and crucial for the Safe credit to study about the firms' credit worthiness which will provide knowledge about the firms' possibility of getting default. As an analyst of PMC Inc., it is necessary to provide knowledge to the Safe credit about the possibility of getting default by the firms in credit so that the Safe credit can take appropriate measures to over come the risk.

Discussion

For firms who are working at large level and the small businesses, the decision to provide credit can raise many concerns for the Safe credit about their ability to repay. These must be resolved in advance to avoid future problems of insolvency. This is where the analysis of the credit worthiness is crucial part for the Safe credit. In relation to the credit worthiness of the firms, the solvency of a company is defined for an undertaking to have sufficient resources to repay the credit that was granted by the Safe credit (Paul, 2009). Therefore, Safe credit should analyze the resources of the firms so that it is known that the firms can repay their credit. After analyzing the resources that must satisfy the debt, it is necessary to determine whether the company is willing to make the payments actually due. This is where the background in accounting for credit prior to the Safe credit becomes important.

For Safe credit, it is necessary to evaluate the creditworthiness of a company as the failure to pay some clients or constantly late payment has a negative impact on the financial situation of the Safe credit that have granted the credit (Richard, 2007). In addition to this, the recovery procedures for outstanding use of time and money, so to avoid this, Safe credit need to check the solvency of a company if Safe credit need to work in the long run with it, a potential customer or client who had requested a high credit line.

To determine the creditworthiness of a company, Safe credit must get the balance sheet of the business along with the knowledge of probability of default, age of the firm, industry, debt ratio, geographical, region, total assets and price to book ratio. Safe credit should check the current amount of indebtedness of the firms. By comparing the ratio of current debt and income, it is possible to determine whether the borrower or the debtor may face another credit obligation without the risk of default (Aiken, West and Reno, 1991).

This element of the evaluation is in the best interest of the borrower because it allows Safe credit to verify the ability to manage and repay another loan contracted otherwise prejudice the general creditworthiness (Groppelli and Ehsan, ...