Which group evaluates a business's ability to pay its obligations when extending credit?

• A. Government
• B. Potential Investors/Creditors
• C. Financial Institutions/Creditors
• D. Employees

Answer: (C)

Evaluating a borrower’s ability to repay when deciding whether to extend credit is about credit risk and repayment capacity. Financial institutions and other creditors perform this analysis because they are the ones providing funds and want to know if the business can generate enough cash to meet debt obligations. They examine financial statements for liquidity and cash flow, and they use metrics like the current ratio, debt service coverage, and overall leverage to judge whether there will be enough resources to cover interest and principal payments. They also consider profitability, operating history, and any collateral that could back the loan.

Government entities focus more on compliance, taxes, and regulation rather than extending credit. Potential investors or creditors look at the business’s profitability and investment risk, but extending credit is the lenders’ primary role. Employees aren’t involved in credit decisions.