April 23, 2025 l Business Mirror
Every business requires credit, whether from institutional lenders like banks, from investors like those in the capital (bond) market or from personal private sources like relatives and friends.
One would expectedly start business with one’s own capital; but this is never enough. Nor should anyone depend totally on personal capital and lose the advantage of leverage.
With full conviction we can say, credit is essential for business. But credit is never free. It has a cost. And beyond cost, credit is accompanied by risks–to the lender or creditor (“Will I be paid back?”) and as well to the borrower or debtor (“Can I be able to pay back?”). In other words, there’s always the credit risk attached to the extension of credit–in any form through any channel, and however sourced.
Yet, despite the risks, credit does flow from lenders to borrowers, from investors to debt securities issuers. Business thrives with available credit nevertheless.
The reason is, credit risks can be managed. The uncertainty that credit risk brings can be anticipated, can be avoided, can be mitigated, can be shared or transferred. There are ways to handle the possibility of loss or damage from credit risks.
But we must note, the management of credit risks requires information, more specifically, good and reliable credit information.
We can never be exactly sure of what will happen tomorrow. By definition, risks are uncertain. But we can make predictions of possible scenarios, and get prepared.
Parenthetically, our lending practices continue to require properties for collateral or security for borrowing, but property is what most small business entrepreneurs do not have, and this cuts them off from needed credit. Good credit information should theoretically be a satisfactory substitute to hard collateral.
Credit information indeed comes in many forms, from several sources. When available they need to be evaluated for authenticity, for validity and relevance, for materiality and significance, and for other refining criteria. This in turn requires analytical experience and good judgment.
That’s why we have credit officers; they are trained for the job. And when we need greater scrutiny for credit quality because we are tapping the capital market for funds where long-term repayment commitments are made to a large number of investors in debt instruments of large amounts, then we need the credit opinion of independent credit rating agencies to provide the evaluation of credit risks.
Connectedly, good credit information is central to the whole evaluation exercise.
***The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX. For comments, email santidumlaojr@gmail.com. Photo is from Pinterest.