CLFP Credit Analysis & Risk Assessment 1 — Questions and Answers
Question 1: Which financial ratio is most commonly used to assess a lessee's ability to service debt from operating cash flow?
- Debt Service Coverage Ratio (DSCR) (Correct answer)
- Current Ratio
- Price-to-Earnings Ratio
- Return on Equity
Correct 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.
Question 2: In equipment leasing credit analysis, what does 'character' refer to in the 'Five Cs of Credit'?
- The borrower's reputation and willingness to repay based on credit history and integrity (Correct answer)
- The dollar amount of collateral pledged
- The economic conditions affecting repayment
- The borrower's cash flow capacity
Correct 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.
Question 3: What is a 'personal guarantee' in equipment leasing and when is it typically required?
- 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 (Correct answer)
- A government guarantee program for large transactions
- An insurance product that covers lease payments
- A vendor's commitment to buy back equipment
Correct 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.
Question 4: What does a 'credit score' cutoff mean in the context of small-ticket equipment leasing?
- A minimum FICO or business credit score below which an application is automatically declined or requires additional review (Correct answer)
- The maximum loan amount for a given credit tier
- The equipment's resale value threshold
- The minimum years in business required
Correct 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.
Question 5: What is 'concentration risk' in a lease portfolio?
- Excessive exposure to a single industry, geography, equipment type, or obligor that increases portfolio vulnerability (Correct answer)
- The risk that interest rates will concentrate at one level
- The risk of equipment becoming obsolete
- The risk of currency fluctuations in a single market
Correct 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.
Question 6: In credit underwriting, what does 'time in business' (TIB) indicate?
- How long the applicant's business has been operating, used as a proxy for stability and track record (Correct answer)
- The duration of the proposed lease term
- The number of years the applicant has owned equipment
- The length of the lessor's relationship with the vendor
Correct 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.
CLFP Credit Analysis & Risk Assessment 1
Which financial ratio is most commonly used to assess a lessee's ability to service debt from operating cash flow?