A global cash flow analysis should help to determine current and

expected cash flow and provide realistic expectations of a borrower’s

ability to meet current and future debt service requirements. A

borrower’s credit history and financial strength are key components

of assessing their willingness and ability to repay, but an institution

shouldn’t forget about management’s ability to operate the company

with a well-thought-out business plan. Loan structures should be

appropriate for the type of credit, and sources of repayment should

cover the expected timing of the business’s cyclical cash flow.

Further, lenders should assess secondary sources of repayment,

such as guarantor’s strength and liquidity. Lenders should ask

themselves: does this guarantor have financial resources, other

means or collateral, or the ability to provide additional capital? An

institution’s risk management practices should provide for written

policies, controls, and a monitoring process for its lending activities,

and provide for accountability to management.