The risks of a line of credit are not in the financial statements, but in the reasons for how the financial statements appear. We receive an excessive quantity of numbers in financial statements. However, it is actually the events that produce the numbers that contain the risks.
By asking the right questions related to the risk of the industry, the marketplace, management, as well as specific events that will impact the borrower, we can uncover the qualitative factors that could impact the repayment of the debt.
Detail what managing credit risk means.
Understand the marketplace and management’s response.
Review the risks associated with the industry, the marketplace, and management.
Discuss the right questions to ask to get the information needed.
Recognition that risk is not in the numbers but the “why”.
Understand the key areas where risk will arise in a borrower.
Assess the core credit risk imbedded in the marketplace, management, and industry.
Enhance communications of risk issues in credit memos.