The capacity of a borrower in repaying debts is the most important aspect of credit analysis. The lender should know precisely how and when the borrower will repay the amount due. The things to be considered while evaluating capacity are the cash receipts from the borrower, the timing of these cash flows and the chances of full repayment.
In order to identify the capacity of the borrower the historical cash flows should be assessed, if the liquidity of the borrower has been risky in the past there is a chance that these cash flows would not perform well in the future. If this condition of cash flows is prevalent the borrower needs to identify how the loan would increase the profitability and eventually the cash flows to repay the principal and interest amounts. The borrower must also identify the contingency plans to cover the repayment of debt in situations where cash flows may decline due to any unfavorable incidents in the future.
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