B.

 Managing Credit Risk in Money Market 

Credit Risk is one type of business risk. It is the risk that the borrower was not able not repay its
obligation. Such risk is evaluated as a factor to determine the cost of lending or financing using debt.
Credit risk also affects the valuation of accounts receivable.

 Credit Ratings

Credit Ratings 
A credit rating is a quantified assessment of the creditworthiness of a borrower in general terms or with
respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that
seeks to borrow money—an individual, corporation, state or provincial authority, or sovereign government.
Individual credit is scored from by credit bureaus such as Experian and TransUnion on a three-digit
numerical scale using a form of Fair Isaac (FICO) credit scoring. Credit assessment and evaluation for
companies and governments is generally done by a credit rating agency such as  Standard & Poor's
(S&P), Moody's, or Fitch. These rating agencies are paid by the entity that is seeking a credit rating for
itself or for one of its debt issues.

KEY TAKEAWAYS

 A credit rating is a quantified assessment of the creditworthiness of a borrower in

general terms or with respect to a particular debt or financial obligation.

 A credit rating not only determines whether or not a borrower will be approved for a loan
or debt issue but also determines the interest rate at which the loan will need to be
repaid.

 A credit rating or score can be assigned to any entity that seeks to borrow money—an
individual, corporation, state or provincial authority, or sovereign government.

 Individual credit is rated on a numeric scale based on the FICO calculation, bonds issued
by businesses and governments are rated by credit agencies on a letter-based system.

Credit ratings are one of the drivers of interest rates or risk considerations. Credit rating affects the
confidence level of the investors to countries or companies. They are determined by companies that are
recognized globally that objectively assigns or evaluates countries and companies based on the riskiness
of doing business with them. The riskiness is primarily driven by their ability to manage their liquidity
and solvency in the long run. The higher the grade, the lower the default risk associated to the country
or company. These three major rating companies are: Standard and Poor’s Corporation (S&P); Moody’s
Investors Service, and Fitch Ratings.

Note that the credit ratings provided by these companies are just recommendatory opinion and will serve as
reference only and does not absolutely provide default probability to the companies.

Standard & Poor's

Henry Varnum Poor first published the History of Railroads and Canals in the United States in 1860, the
forerunner of securities analysis and reporting to be developed over the next century. Standard Statistics
formed in 1906, which published corporate bond, sovereign debt, and municipal bond ratings. Standard
Statistics merged with Poor's Publishing in 1941 to form  Standard and Poor's Corporation, which was
acquired by The McGraw-Hill Companies, Inc. in 1966. Standard and Poor's has become best known by indexes

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such as the S&P 500, a stock market index that is both a tool for investor analysis and decision-making
and a U.S. economic indicator.

Moody's Investors Service

John Moody and Company first published  Moody's Manual in 1900. The manual published basic statistics and
general information about stocks and bonds of various industries. From 1903 until the stock market crash
of 1907, Moody's Manual was a national publication. In 1909, Moody began publishing Moody's Analyses of
Railroad Investments, which added analytical information about the value of securities.
Expanding this idea led to the 1914 creation of Moody's Investors Service, which in the following 10
years, would provide ratings for nearly all of the government bond markets at the time. By the 1970s
Moody's began rating commercial paper and bank deposits, becoming the full-scale rating agency that it is
today.
Moody’s classify the credit standing into the ratings in the table for the Moody’s rating Scale:

Fitch Ratings
John Knowles Fitch founded the Fitch Publishing Company in 1913, providing financial statistics for use in
the investment industry via "The Fitch Stock and Bond Manual" and "The Fitch Bond Book." In 1924, Fitch
introduced the AAA through a D rating system that has become the basis for ratings throughout the
industry.
With plans to become a full-service global rating agency, in the late 1990s, Fitch merged with IBCA of
London, subsidiary of Fimalac, S.A., a French holding company. Fitch also acquired market competitors
Thomson BankWatch and Duff & Phelps Credit Ratings Co. Beginning in 2004, Fitch began to develop operating
subsidiaries specializing in enterprise risk management, data services, and finance-industry training with
the acquisition of a Canadian company, Algorithmics, and the creation of Fitch Solutions and Fitch
Training.
They provide credit opinions based on credit expectations based on the certain quantitative and
qualitative factors that drive the company. They asses based on the credit analysis and intensive
research.

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A credit rating not only determines whether or not a borrower will be approved for a loan but also
determines the interest rate at which the loan will need to be repaid. Since companies depend on loans for
many startup and other expenses, being denied a loan could spell disaster, and a high interest rate is
much more difficult to pay back. Your credit rating should play a role in deciding which lenders to apply
to for a loan. The right lender for someone with perfect credit likely will be different from someone
with very good, or even poor credit.

Credit ratings also play a large role in a potential investor's determining whether or not to purchase
bonds. A poor credit rating is a risky investment; it indicates a larger probability that the company will
be unable to make its bond payments.

 Credit Information System 

The Credit Information Corporation (CIC) is a government-owned and controlled corporation providing credit

information system in the Philippines. It was created in 2008 by the Credit Information System Act
(CISA) to construct a centralized, comprehensive credit information system for the collection and
dissemination of accurate and fair information relevant to, or arising from, credit and credit-related
activities of all entities participating in the financial system. This credit information is to be
collected from various sources such as banks, financial institutions, insurance companies, financing
companies, credit cooperatives, as well as utility companies and other businesses that extend loans. The
CIC compiles this credit information to help creditors evaluate the ability of borrowers to pay.

The credit information system is intended to straightforwardly address the need for dependable credit
information of borrowers and is supposed to significantly improve the overall availability of credit
especially to micro, small and medium-scale enterprises; to make credit more cost-effective; and to reduce
the dependence on collateral to secure credit facilities. [6] An efficient credit information system is also
supposed to enable financial institutions to reduce their over-all credit risk, contributing to a
healthier and more stable financial system

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By law, the credit information should be provided at the least cost to all participants and the CIC should
ensure the protection of consumer rights and the existence of fair competition in the industry at all
times.

REPUBLIC ACT No. 9510   

AN ACT ESTABLISHING THE CREDIT INFORMATION SYSTEM AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:
Section 4. Establishment of the Credit Information System. - In furtherance of the policy set forth in
Section 2 of this Act, a credit information system is hereby established.

(a) Banks, quasi-banks, their subsidiaries and affiliates, life insurance companies, credit card
companies and other entities that provide credit facilities are required to submit basic credit
data and updates thereon on a regular basis to the Corporation.
(b) The Corporation may include other credit providers to be subject to compulsory
participation: Provided, That all other entities qualified to be submitting entities may
participate subject to their acceptance by the Corporation: Provided, further, That, in all cases,
participation under the system shall be in accordance with such standards and rules that the SEC
in coordination with the relevant government agencies my prescribe.
(c) Participating submitting entities are required to submit to the Corporation any negative and
positive credit information that tends to update and/or correct the credit status of borrowers.
The Corporation shall fix the time interval for such submission: Provided, That such interval
shall not be less than fifteen (15) working days but not more than thirty (30) working days.
(d) The Corporation should regularly collect basic credit data of borrowers at least on a
quarterly basis to correct/update the basic credit data of said borrowers.
(e) The Corporation may also access credit and other relevant information from government offices,
judicial and administrative tribunals, prosecutorial agencies and other related offices, as well
as pension plans administered by the government.
(f) Each submitting entity shall notify its borrowers of the former’s obligation to submit basic
credit data to the Corporation and the disclosure thereof to the Corporation, subject to the
provisions of this Act and the implementing rules and regulations.
(g) The Corporation is in turn authorized to release consolidated basic credit data on the
borrower, subject to the provisions of Section 6 of this Act.
(h) The negative information on the borrower as contained in the credit history files of borrowers
should stay in the database of the Corporation unless sooner corrected, for not more than three
(3) years from and after the date when the negative credit information was rectified through
payment or liquidation of the debt, or through settlement of debts through compromise agreements
or court decisions that exculpate the borrower from liability. Negative information shall be
corrected and updated within fifteen (15) days from the time of payment, liquidation or settlement
of debts.
(i) Special Accessing Entities shall be accredited by the Corporation in accordance with such
standards and rules as the SEC in coordination with the relevant government agencies, may
prescribe.
(j) Special accessing entities shall be entitled access to the Corporation’s pool of consolidated
basic credit data, subject to the provisions of Section s 6 and 7 of this Act and related
implementing rules and regulations.
(k) Special accessing entities are prohibited from releasing basic credit data received from the
Corporation or credit reports and credit ratings derived from the basic credit data received from
the Corporation, to non-accessing entities unless the written consent or authorization has been
obtained from the Borrower: Provided, however, That in case the borrower is a local government
unit (LGU) or its subsidiary or affiliate, the special accessing entity may release credit
information on the LGU, its subsidiary or affiliate upon written request and payment of reasonable
fees by a constituent of the concerned LGU.

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 (l) Outsource Entities, which may process and consolidate basic credit data, are absolutely
prohibited from releasing such data received from the Corporation other than to the Corporation
itself.
(m) Accessing Entities shall hold strictly confidential any credit information they receive from
the Corporation.
(n) The borrower has the right to know the causes of refusal of the application for credit
facilities or services from a financial institution that uses basic credit data as basis or ground
for such a refusal.
(o) The borrower, for a reasonable fee, shall have, as a matter of right, ready and immediate
access to the credit information pertinent to the borrower. In case of erroneous, incomplete or
misleading credit information, the subject borrower shall have the right to dispute the erroneous,
incomplete, outdated or misleading credit information before the Corporation. The Corporation
shall investigate and verify the disputed information within five (5) working days from receipt of
the complaint. If its accuracy cannot be verified and cannot be proven, the disputed information
shall be deleted. The borrower and the accessing entities and special accessing entities who have
received such information shall be informed of the corresponding correction or removal within five
(5) working days. The Corporation should use a simplified dispute resolution process to fast track
the settlement/resolution of disputed credit information. Denial of these borrowers’ rights,
without justifiable reason, shall entitle the borrower to indemnity.

Section 5. Establishment of the Central Credit Information Corporation. - There is hereby created a
Corporation which shall be known as the Credit Information Corporation, whose primary purpose shall be to
receive and consolidate basic credit data, to act as a central registry or central repository of credit
information, and to provide access to reliable, standardized information on credit history and financial
condition of borrowers.

(a) The Corporation is hereby authorized to adopt, alter, and use a corporate seal which shall be
judicially noticed; to enter into contracts; to incur liabilities; to lease or own real or
personal property, and to sell or otherwise dispose of the same; to sue and be sued; to
compromise, condone or release any liability and otherwise to do and perform any and all things
that may be necessary or proper to carry out the purposes of this Act.
(b) The authorized capital stock of the Corporation shall be Five hundred million pesos
(P500,000,000.00) which shall be divided into common and preferred shares which shall be non-
voting. The National Government shall own and hold sixty percent (60%) of the common shares while
the balance of forty percent (40%) shall be owned by and held by qualified investors which shall
be limited to industry associations of banks, quasi-banks and other credit related associations
including associations of consumers. The amount of Seventy-five million pesos (PhP75,000,000.00)
shall be appropriated in the General Appropriations Act for the subscription of common shares by
the National Government to represent its sixty percent (60%) equity share and the amount of Fifty
million pesos (PhP50,000,000.00) shall be subscribed and paid up by such qualified investors in
accordance with Section 5(d) hereof.
(c) The National Government may subscribe or purchase securities or financial instrument that may
be issued by the Corporation as a supplement to capital.
(d) Equal equity participation in the Corporation shall be offered and held by qualified private
sector investors but in no case shall each of the qualified investor represented by an association
of banks, quasi-banks and other credit-related associations including the associations of
consumers have more than ten percent (10%) each of the total common shares issued by the
Corporation.
(e) The SEC in coordination with relevant government agencies, shall prescribe additional
requirements for the establishment of the Corporation, such as industry representation, capital
structure, number of independent directors, and the process for nominating directors, and such
other requirements to ensure consumer protection and free, fair and healthy competition in the
industry.
(f) The Chairman of the SEC shall be the Chairman of the Board of Directors of the Corporation.
Whenever the Chairman of the SEC is unable to attend a meeting of the Board, he/she shall
designate an Associate Commissioner of the SEC to act as his/her alternate.
The powers and functions of the Corporation shall be exercised by a board of directors composed of
fifteen (15) members. The directors representing the government shares shall be appointed by the
President of the Philippines.

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 (g) The directors and principal officers of the Corporation, shall be qualified by the "fit and
proper" rule for bank directors and officers. To maintain the quality of management of the
Corporation and afford better protection to the system and the public in general, the SEC in
coordination with the relevant government agencies, shall prescribe, pass upon and review the
qualifications and disqualifications of individuals elected or appointed directors of the
Corporation and disqualify those found unfit. After due notice to the board of directors of the
Corporation, the SEC may disqualify, suspend or remove any director who commits or omits an act
which render him unfit for the position. In determining whether an individual is fit and proper to
hold the position of a director of the Corporation, due regard shall be given to his integrity,
experience, education, training and competence.
The members of the Board of Directors must be Filipino citizens and at least thirty (30) years of
age. In addition, they shall be persons of good moral character, of unquestionable integrity, of
known probity, and have attained competence in the fields of law, finance, economics, computer
science or information technology. In addition to the disqualifications imposed by the Corporation
Code, as amended, no person shall be nominated by the national government if he has been connected
directly with a banking or financial institution as a director or officer, or has substantial
interest therein within three (3) years prior to his appointment.
(h) The Board of Directors may appoint such officers and employees as are not otherwise provided
for in this Act, define their duties, fix their compensations and impose disciplinary sanctions
upon such officers and employees, for cause. The salaries and other compensation of the officers
and employees of the Corporation shall be exempt from the Salary Standardization Law. Appointments
in the Corporation, except to those which are policy-determining, primarily confidential or highly
technical in nature, shall be made only according to the Civil Service Law.
(i) The Corporation shall acquire and use state-of-the-art technology and facilities in its
operations to ensure its continuing competence and capability to provide updated negative and
positive credit information; to enable the Corporation to relay credit information electronically
as well as in writing to those authorized to have access to the credit information system; and to
insure accuracy of collected, stored and disseminated credit information. The Corporation shall
implement a borrower’s identification system for the purpose of consolidating credit information.
(j) The provisions of any general or special law to the contrary notwithstanding, the importation
by the Corporation of all equipment, hardware or software, as well as all other equipment needed
for its operations shall be fully exempt from all customs duties and from all other taxes,
assessments and charges related to such importation.
(k) The Corporation shall have its principal place of business in Metro Manila, but may maintain
branches in such other places as the proper conduct of its business may require.
(l) Any and all acquisition of goods and services by the Corporation shall be subject to
Procurement Laws.
(m) The national government shall continue to hold sixty percent (60%) of the common shares for a
period not to exceed five (5) years from the date of commencement of operations of the
Corporation. After the said period, the national government shall dispose of at least twenty
percent (20%) of its stockholdings in the Corporation to qualified investors which shall be
limited to industry associations of banks, quasi-banks and other credit-related associations,
including associations of consumers. The national government shall offer equal equity
participation in the Corporation to all qualified investors. When the ownership of the majority of
the common voting shares of the Corporation passes to private investors, the stockholders shall
cause the adoption and registration with the SEC of the amended articles of incorporation within
three (3) months from such transfer of ownership.

 Cost of Debt 

The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such
as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the
company's cost of debt before taking taxes into account. However, the difference in the cost of debt
before and after taxes lies in the fact that interest expenses are deductible.

Cost of debt is one part of a company's capital structure, which also includes the  cost of equity. Capital
structure deals with how a firm finances its overall operations and growth through different sources of
funds, which may include debt such as bonds or loans, among other types.

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The cost of debt measure is helpful in understanding the overall rate being paid by a company to use these
types of debt financing. The measure can also give investors an idea of the company's risk level compared
to others because riskier companies generally have a higher cost of debt.

 Managing Liquidity and Solvency 

Investors, lenders, and managers all look to a company's financial statements using liquidity measurement
ratios to evaluate liquidity risk. This is usually done by comparing  liquid assets and short-term
liabilities, determining if the company can make excess investments, pay out bonuses or, meet their debt
obligations. Companies that are over-leveraged must take steps to reduce the gap between their cash on
hand and their debt obligations. When companies are over-leveraged, their  liquidity risk is much higher
because they have fewer assets to move around.

All companies and governments that have debt obligations face liquidity risk, but the liquidity of major
banks is especially scrutinized. These organizations are subjected to heavy regulation and stress tests to
assess their liquidity management because they are considered economically vital institutions. Here,
liquidity risk management uses accounting techniques to assess the need for cash or collateral to meet
financial obligations. The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 raised
these requirements much higher than they were before the 2008 Financial Crisis. Banks are now required to
have a much higher amount of liquidity, which in turn lowers their liquidity risk.

Investors still use liquidity ratios to evaluate the value of a company's stocks or bonds, but they also
care about a different kind of liquidity management. Those who trade assets on the stock market cannot
just buy or sell any asset at any time; the buyers need a seller, and the sellers need a buyer.
Liquidity ratios are an important class of financial metrics used to determine a debtor's ability to pay
off current debt obligations without raising external capital. Liquidity ratios measure a company's
ability to pay debt obligations and its margin of safety through the calculation of metrics including
the current ratio, quick ratio, and operating cash flow ratio.

When a buyer cannot find a seller at the current price, he or she must usually raise his or her  bid to
entice someone to part with the asset. The opposite is true for sellers, who must reduce their ask prices
to entice buyers. Assets that cannot be exchanged at a current price are considered  illiquid. Having the
power of a major firm who trades in large stock volumes increases liquidity risk, as it is much easier to
unload (sell) 15 shares of a stock than it is to unload 150,000 shares. Institutional investors tend to
make bets on companies that will always have buyers in case they want to sell, thus managing their
liquidity concerns.

Investors and traders manage liquidity risk by not leaving too much of their portfolios in illiquid
markets. In general, high-volume traders, in particular, want highly liquid markets, such as the forex
currency market or commodity markets with high trading volumes like crude oil and gold. Smaller companies
and emerging tech will not have the type of volume traders need to feel comfortable executing a buy order.
Liquidity management is a cornerstone of every treasury and finance department. Those who overlook a
firm’s access to cash do so at their peril, as has been witnessed so many times in the past.

In essence, liquidity management is the basic concept of the access to readily available cash in order to
fund short-term investments, cover debts, and pay for goods and services.
Liquidity planning is crucial, and involves finance and treasury managers’ ability to look to the
company’s balance sheet and convert funds that are tied up in longer-term projects into cash for the firm
to use in its day to day operations.

In order to keep a regular grasp of the firm’s liquidity risk, managers will monitor the liquidity ratio –
in which firms will compare their most liquid assets (those that can be converted into cash easily and
quickly), with short term liabilities, or near-term debt obligations.

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The importance of liquidity management cannot be understated. Liquidity risk, which treasurers and finance
department managers constantly attempt to downplay, can lead to a variety of problems and pull a company
into ill health.

Should the firm find itself unable to meet short term cash obligations, or cash equivalent obligations as
set out in contractual terms with depositors and borrowers, it may find itself in a position in which it
must sell illiquid assets quickly – which could lead to a situation in which it may be forced to accept
less than those assets’ fair value. Avoiding such as situation is key to successful  liquidity risk
management.

There are a variety of different techniques applied by firms across the globe that help mitigate liquidity
risks and assist with liquidity planning:

Receivables management – the strict approach to ensuring that clients and customers maintain payments in a
timely and orderly fashion – is crucial.

Generally speaking, clients will pay in such a way that the firm will be able to use the funds to meet
short term obligations. However, with many contracts, deals and invoices stipulating a required time
period within which the client must meet their payment obligations, monitoring each client’s outstanding
payments and ability to pay themselves is fundamental to the smooth running of the business.

This element of receivables management comes under the umbrella of cash forecasting – a key concept in
good liquidity management. A good cash flow forecast accurately predicts the cash inflows and outflows
expected over a pre-defined period in the future, normally twelve months.

It includes projected income and expenses, and is informed by the previous period’s accounts. Being able
to accurately assess when a company will have access. Within that, payables management is another
cornerstone of good liquidity management. This is the maintenance of the firm’s outstanding liabilities
and debts to third parties – any goods or services supplied to the firm – made on credit.
In accounting, liquidity refers to the ability of a business to pay its liabilities on time. Current
assets and a large amount of cash are evidence of high liquidity levels.
It also refers to how easily an asset can be converted into cash on short notice and at a minimal
discount. Assets such as stocks and bonds are liquid since they have an active market with many buyers and
sellers. Companies that lack liquidity can be forced into bankruptcy even if it’s solvent. Solvency refers
to the business’ long-term financial position. A solvent business is one that has positive net worth – the
total assets are more than the total liabilities
Solvency is assessed using solvency ratios. These ratios measure the ability of the business to pay off
its long-term debts and interest on debts.
Budgeting is an important part of financial management. Being able to keep a tight budget allows you to
stay ahead of schedule. Everyone in the company knows approximately how much money is coming in and when
it’s arriving. If the company foresees a shortfall of cash, they can reallocate resources to remedy the
problem. This helps businesses remain solvent. By projecting cash flows, a company is able to acquire debt
much more confidently. If there was no budget in place, you could wind up in a scenario where money needs
to be re-invested into a crucial part of the business but because the company took out debt, they must
first meet their debt obligation. Since a company’s solvency is extremely important to those on the inside
and outside, there are a few financial ratios that can give you a better idea about how solvent a company
is.

 Valuation of Collaterals 

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Collateral Valuation Methods:
Commercial borrowers may pledge equipment, real property, investments and other assets as loan collateral.
But the amount shown on a borrower’s balance sheet may not reflect an item’s current market value. A
formal asset appraisal can help lenders understand how much an asset is worth today.
Review appraisal basics
Whether you’re appraising a building, trademark, artwork or investments in a subsidiary, the
approaches to valuing an asset are essentially the same. Appraisal boils down to three primary
techniques:
Cost approach.  The value of an asset can be determined by the cost to replace or reproduce it.
Under this approach, appraisers’ factor in functional and operational obsolescence. When valuing
investments in private company stock using this approach, an appraiser would subtract liabilities
from the combined fair market values of the company’s assets.
Market approach.  An asset is worth as much as other assets with similar utility in the marketplace
under this approach. With investments in private company stock, for example, an appraiser might
look at recent transactions involving other companies in the same industry and compute pricing
multiples from those comparable.
Income approach.  Investors pay for the expected cash they’ll receive every year from an asset and
when the asset is eventually sold (or salvaged) in the future. Often appraisers “discount” future
earnings based on the asset’s risk, using a discounted cash flow analysis.
Appraisers always consider all three approaches, but one or two may be more relevant than the
rest. For example, the cost and market approaches might be more relevant when valuing vacant land.
Conversely, the market and income approaches might be more relevant when valuing a rental property
with an established rent roll.
Define “value”
There are several definitions — or standards — of value. One of the most commonly quoted
definitions of fair market value comes from IRS Revenue Ruling 59-60: “the price at which the
property would change hands between a willing buyer and a willing seller, when the former is not
under any compulsion to buy and the latter is not under any compulsion to sell, both parties
having reasonable knowledge of relevant facts.”
Although this standard of value doesn’t apply in every situation, it highlights key assumptions.
Namely, both parties — the buyer and seller — are knowledgeable and not compelled to deal. These
assumptions may not be valid if, say, a buyer of a business interest hasn’t performed adequate due
diligence — or if a distressed company needs cash to make payroll.
In the latter situation, liquidation value may be more relevant to its creditors. Orderly
liquidation assumes that assets are sold over a reasonable time period and sometimes bundled
together to maximize the net sales proceeds. Conversely, forced liquidation assumes that assets
are quickly sold, typically in an auction. In these dire situations, it’s common for the company
to receive 50 cents (or less) for every dollar on its balance sheet.
Know when to request appraisals
Here are a few situations that might warrant an appraisal:
Mergers and acquisitions. If a borrower plans to merge with or acquire another company, they often
need bank financing. An appraisal can help demonstrate that the purchase price is reasonable.
Expansion plans.  If a company plans to grow using internal resources, it may need a line of credit
to fund its incremental working capital requirements or a long-term loan for new property or
equipment. Appraisers can value all kinds of assets — including used equipment, vacant land and
patents — that may eventually become loan collateral.
Reorganizations.  A distressed borrower may attempt to turn its operations around by cutting costs
and divesting unprofitable assets. An appraiser can help evaluate reorganization alternatives,
including the long-term effects on future cash flow.
Bankruptcies.  Appraisers can help lenders understand how much cash a borrower is likely to receive
under various liquidation scenarios. They can also support decisions to reorganize or liquidate.
Additionally, some lenders recommend that borrowers obtain formal appraisals if their loans are
denied, based on today’s stricter underwriting requirements. An appraisal may convince
underwriters to make an exception to the bank’s strict rules. This may be true for growing
companies with limited credit histories or established companies with appreciated assets on the
balance sheet that are reported at their original cost from decades ago.
SBA appraisal requirements

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 For banks that participate in the Small Business Administration (SBA) loan program, lenders may be
required to ask certain borrowers for independent business valuations.  The appraisal provisions
apply specifically to SBA 7(a) program loans, not microloans, Certified Development Company/504
loans or other SBA programs.
The SBA requires an independent valuation from a qualified source when 7(a) proceeds will be used
to finance a “change of ownership” only if the amount being financed from all sources (including
non-SBA loans and seller financing) — less the appraised value of real estate and equipment — is
more than $250,000. An independent appraisal also may be requested when there’s a “close
relationship” between the buyer and seller.
Foster smarter lending decisions
When borrowers pledge assets as collateral, lenders can’t always rely on balance sheet values.
Sometimes an appraisal professional is called in to help the borrower and lender understand how
much an asset is worth.

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Alcera, Vincent Luigil C.