CLFP Credit Analysis & Risk Assessment 2

Question 1

What is 'adverse selection' in the equipment finance industry?

Accepted Answer

The tendency for higher-risk borrowers to seek financing more aggressively, skewing a portfolio toward riskier credits

Answer

Adverse selection occurs because high-risk borrowers who can't get credit elsewhere pursue every financing option, potentially causing a lessor's portfolio to attract disproportionately risky customers.

Question 2

What is 'accounts receivable (A/R) aging' analysis used for in credit underwriting?

Accepted Answer

To assess how quickly the lessee collects payments from its own customers, indicating cash flow quality

Answer

A/R aging shows how current a lessee's receivables are; slow collections may signal cash flow problems that could affect lease payment ability.

Question 3

What is 'cash flow from operations' (CFO) and why is it the most important financial statement metric for lease underwriters?

Accepted Answer

CFO is the cash generated by core business operations, and it directly shows whether a lessee can fund lease payments without relying on asset sales or new debt

Answer

CFO excludes financing and investing activities, showing the true cash-generating power of the business that will ultimately service the lease obligation.

Question 4

What is a 'blanket lien' (also called an all-asset lien) in equipment financing?

Accepted Answer

A UCC filing that gives the secured party an interest in all of the debtor's assets, present and future

Answer

A blanket lien covers all of a debtor's assets as collateral, providing broad protection for the secured party but potentially subordinating other lenders.

Question 5

What does 'global cash flow analysis' mean in underwriting?

Accepted Answer

Analyzing cash flow from all entities and individuals (business + guarantors) to assess total repayment capacity

Answer

Global cash flow analysis combines the business's cash flow with the personal finances of guarantors to get a complete picture of total debt service capacity.

CLFP - Certified Lease & Finance Professional Practice Test

CLFP - Certified Lease & Finance Professional Practice Test

CLFP Credit Analysis & Risk Assessment 2