United Nations Economic and Social Commission for Asia and the Pacific MSME Financing Series No. 6 - Small and Medium-Sized Enterprises Lending

The solidity of the balance sheet and the associated ability to support the debt burden that the proposed lending will impose are factors revealed through an examination of financial Condition and Capacity. [...] Questions should be refined to the point where the predictive capacity of the score is greatest (where the smallest number of defaulters receive a passing score, and the smallest number of repayers a failing score). [...] In addition to extracting the cash flow by running an income statement through an opening and closing balance sheet, a typical credit analysis includes the computation of structural balance sheet ratios, revealing the firm’s financial Condition (as per the Five C’s), calculating the “leverage ratio,” (Capacity) showing the effect of the proposed loan on the critical ratio Total Liabilities/Capital. [...] That the borrower represents and warrants that it is a legal entity in compliance with all laws and regulations of the jurisdiction in question; that the borrower is current with all tax obligations; that the borrower is registered with the required local authorities, and that it be “in good standing.” In general, the borrower’s affirmation of the MSME ACCESS TO FINANCE: LENDING APPROACHES: THE RO. [...] While the objective of the fund may be to accustom banks to taking SME risks on their books, the actual success of the schemes lies simply in the risk substitution.