Which Factors Affect Expected Credit Losses (CECL) for My Business?

There are many variables that may influence expected credit losses for your business. If you find that your business is experiencing credit concerns, consider the possibility of refinancing through loans and lines of credit. Your corporate credit risk is affected by industry conditions, economic cycles of growth and decline, your business’s profitability patterns and the valuation of existing liabilities. It’s important to comprehend the factors that determine your business’s credit when applying for loans and financing options.

Policy Changes

Understanding your business’s borrowing policy is crucial as banks and lenders continue to change their policy conditions. For example, check to see if your loan is unsecured or secured by collateral. Is the repayment schedule fixed, or is it tied to your business’s profit margins? If a flexible interest rate has been applied, such as the LIBOR or the Prime Rate, then the abolition of the LIBOR could affect your long-term repayment plans. Any policy changes can be discussed with your lender to determine how it will change your repayment plan.

Qualitative & Environmental

It can be helpful to understand the purpose of qualitative and environmental factors in CECL and the new loan policy of the CECL. The CECL policy may lead to a re-evaluation of certain environmental and qualitative factors. Environmental factors include regional market conditions, regulatory developments and changes in complementary industries. Qualitative factors, on the other hand, are inherent to the business or the outstanding amount yet to be paid on existing financing. Such factors maybe your business’s credit score, the appreciation or depreciation of the collateral, the lender’s policies, the time remaining until maturity and your track record in making scheduled payments.

Incurred Loss vs Expected Loss

The expected loss is subject to different factors than incurred loss because an incurred loss is assessed upon its occurrence, whereas expected loss is calculated prior to the event. CECL depends on a precise, long-term estimate of cash flow and whether such cash flow will suffice to allow the corporate borrower to pay off the outstanding balance over the life of the extended financing agreement.

As a business, you can assess your expected loss in advance before applying for financing to approximate the likelihood that credit will be extended to your business. You can also take advantage of the upcoming CECL regulations to influence your credit score and adjusting any qualitative factors that may not be in your business’s favor.