Credit Analysis & Risk Assessment Flashcards

Which financial ratio is most commonly used to assess a lessee's ability to service debt from operating cash flow?

Answer: Debt Service Coverage Ratio (DSCR)

DSCR measures net operating income divided by total debt service, indicating whether the lessee generates enough cash flow to cover its payment obligations.

In equipment leasing credit analysis, what does 'character' refer to in the 'Five Cs of Credit'?

Answer: The borrower's reputation and willingness to repay based on credit history and integrity

Character assesses the borrower's honesty, integrity, and track record of meeting financial obligations, often evaluated through credit reports and references.

What is a 'personal guarantee' in equipment leasing and when is it typically required?

Answer: A pledge by an individual (usually an owner) to be personally liable for the lease if the business defaults, typically required for small businesses or startups

A personal guarantee makes the individual guarantor personally responsible for lease payments, commonly required when the business entity lacks sufficient credit history or financial strength.

What does a 'credit score' cutoff mean in the context of small-ticket equipment leasing?

Answer: A minimum FICO or business credit score below which an application is automatically declined or requires additional review

Credit score cutoffs are predetermined thresholds used in small-ticket credit decisioning to quickly approve, decline, or escalate applications based on the applicant's credit score.

What is 'concentration risk' in a lease portfolio?

Answer: Excessive exposure to a single industry, geography, equipment type, or obligor that increases portfolio vulnerability

Concentration risk occurs when a portfolio is overly exposed to one segment, making overall performance heavily dependent on that segment's health.

In credit underwriting, what does 'time in business' (TIB) indicate?

Answer: How long the applicant's business has been operating, used as a proxy for stability and track record

TIB is a key underwriting variable because businesses with longer operating histories are statistically less likely to default than newer startups.