M5

Question 1

Five Cs of Credit Analysis

Answer 1

• Capital: amount of equity capital already provided by business founders
• Collateral: business and person assets can be pledged to guarantee the loan
• Conditions: What is the loan for?
• Character: borrower’s character assessment is based on their track record, education, and experience in the industry
• Capacity: what’s their default risk, credit rating?

Question 2

Hard to obtain unsecured credit if:

Answer 2

• firm has mostly intangible assets (e-commerce)

- product is highly technical and hard to understand

Question 3

How do loan officers make a profit?

Answer 3

Their compensation depends on how well their loan pro folio is doing, so they will be biased towards safer borrowers

Question 4

Debt financing for early stages

Answer 4

• Typical chain store vendors: Staples, Office Depot, or Shipping companies might offer small credit limits
• Bank Operating Credit Line: banks may offer small credit line but person guarantee will probably be required
• Equipment leases: credit on leasing equipment
• Credit cards: using personal credit card to finance ST deficit. (50% of venture founds use their own credit cards)