Chapter 23 - Cash Flow Analysis and Lending to Corporate Borrowers

Abstract

Banks have institutionalized the practice of making lending decisions based on cash flow strength of borrowers over time. The recognition that most borrowing causes originate from the borrowers' cash flow timing differences informs the practice. This is especially the case in lending to corporate borrowers. The appeal of cash flow lies in its ability to provide a dependable source of loan repayment. When borrowers are deficient of cash, they tend to default on loans and vice versa. It is therefore essential that credit analysts accurately assess cash flow strength of prospective borrowers as part of their credit analysis memorandum. It is not always easy to calculate cash flows, but in following proven methodological framework for cash flow analysis and interpretation, credit analysts cannot go wrong. This chapter identifies and discusses some of the practical and effective analytical procedures that credit analysts have at their disposal for cash flow calculation, analysis, and interpretation for bank lending purposes.