THE BUSINESS APPLICATION
Where and how to use it
Use it during appraisal, renewal or periodic review when dated business accounts are available. It helps frame targeted questions: whether receivables are building up, whether cash generation supports servicing debt, or whether recent growth is consuming working capital.
A distributor reports rising sales but also rising receivables and short-term borrowing. The review considers cash conversion and debt service before treating sales growth as improved credit quality.
From evidence to a decision
- 01Dated accountsAlign periods and definitions
- 02Financial signalsLiquidity · leverage · cash flow
- 03Distress assessmentFit against observed events
- 04Targeted reviewInvestigate the weak points
DATA REQUIREMENTS
What records does it need?
These are the records your team would bring together for this analysis. The exact fields and history needed depend on your lending products, the question you want to answer and the period you want to assess.
| Record category | What it contains | Why the detail matters |
|---|---|---|
| Financial statements | Dated balance sheets, income statements and cash-flow records; revenue, liabilities, receivables and expenses. | Align reporting periods, units and accounting definitions. |
| Debt obligations | Outstanding debt, interest and scheduled debt service. | Include relevant obligations, not just the proposed facility. |
| Distress outcomes | A documented distress definition and dated observed events. | Needed to fit and evaluate a predictive distress model. |
Past loan outcomes help assess how well an estimate reflects your borrowers. For a new decision, use only the information available at that time; later repayments help you review the result afterwards.
Understand data readiness →WHAT YOU RECEIVE
The output
A distress assessment, ratio-level explanations and a view of missing or stale evidence to guide follow-up.
WHAT TO WATCH
The limitations
Unaudited, outdated or inconsistent accounts weaken inference. Negative or zero denominators need explicit treatment, not arbitrary replacement values.
FOR RISK & ANALYTICAL SPECIALISTSHow the analysis works+
The modelling approach
Methods can combine consistently defined ratios with an interpretable fitted model. Ratios must be derived from the underlying financial statements. Check whether the relationship between financial ratios and distress holds for your borrowers before adopting an external score or cutoff.
What your risk team should review
Period alignment, denominator validity, definition consistency, outcome quality and performance across borrower segments.
The right approach depends on your portfolio and available history. Review the fit to your borrowers, the reliability of the estimates and the effect of missing information before using the result in a lending decision.