Business Credit Evaluation
Credit Review Summary
What Banks Look For
The most fundamental characteristics a prospective lender will want to examine are:
- credit history of the borrower
- cash flow history and projections for the business
- collateral that is available to secure the loan
- character of the borrower
- loan documentation that includes business and personal financial statements, income
tax returns, and frequently a business plan, and that essentially sums up and provides
evidence for the first four items listed
The first three of these criteria are largely objective data (although interpretation of the numbers can be subjective). The fourth item, the borrower's character, allows the lender to make a more subjective assessment of the business's market appeal and the business savvy of its operators. In assessing whether to finance a small business, lenders are often willing to consider individual factors that represent strengths or weaknesses for a loan. Also consider our discussion of how banks judge your application.
Loan Application, Bank Review Form: What Do Banks Really Look For?
Financial Statement: Last 3 years of business financial statements and/or tax returns
Last 3 years of owner¡¦s personal tax return
Current personal financial statement
Cash Flow from Operations
"Why is there so much month left at the end of the money?" ¡X Unknown
The cash flow from your business's operations ¡X the cycle of cash flow, from the purchase of inventory through the collection of accounts receivable ¡X is the most important factor for obtaining short-term debt financing. A lender's primary concern is whether your daily operations will generate enough cash to repay the loan. In addition, cash flow shows how your major cash expenditures relate to your major cash sources. This information may give a lender insight into your business's market demand, management competence, business cycles, and any significant changes in the business over time.
While a variety of factors may affect cash flow and a particular lender's evaluation of your business's cash flow numbers, a small community bank might consider an acceptable working cash flow ratio ¡X the amount of available cash at any one time in relationship to debt payments ¡X to be at least 1.15:1.
As most lenders are aware, cash flow also presents the most troubling problem for small businesses, and they will typically require both historic and projected cash flow statements.
Managing Your Cash Flow
A healthy cash flow is an essential part of any successful business.
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
In year 2012, it is -5% but in 2013, it is improved to 2%. Operating ration shows the operational efficiency of the business. A small value of operating ratio shows that MCS has to take care of its operational activities so further this ratio may be improved.
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
There is a range of criteria relevant for a decision of financing a new venture. To construct my list for the evaluation of a new company as an opportunity I have selected to refer to t...
Financing cycle. Financing activities involve such things as investments in and withdrawals from companies by owners and borrowing and repaying debts. Sage 50 allows users to record receipts separate from customer receipts which can be credited to an equity account to represent investment or to a liability account to represent the borrowing of money.
This includes many area such as overhead cost, how much money is on hand and if we have to borrow, how much. We must also consider our person financial situation since we are a family owned business. While Father and Son had the money up front to start their business we had to determine if necessary how much money would a bank be willing to loan the business if something out of the ordinary or some unforeseen circumstances were to occur. We hear at Father and Son has good understanding of our financial weaknesses and
The subject that I interviewed was Mike from Allstate Insurance. Mike is an agent who owns his own office and has his own employees but at the same time is also an employee himself for the Allstate Corporation. The nature of Allstate is the sales of different lines of insurance policies. Mike's office is very service oriented although they are in the sales business. He classifies his office as a retail business with the explanation that he is selling something that is not provided directly by him, rather by the company, and because what he is selling is being bought.
...el such as: purpose of the loan, maturity of the security pledged, the history of the client with the company and the unique characteristics that the bank’s customers might have.
Currently, the quick ratio is 0.45 which clearly shows a lack of ability to cover short term cash needs. The liquidity decreased from the same period a year ago, despite already having weak liquidity to begin with. This would indicate deterioration cash flow.
The statement of cash flows reports a firm’s major cash inflows and outflows for a period. This statement provides useful information about a company’s ability to generate cash from operations, maintain and expand its operating capacity, meeting its financial obligations, and pay dividends. There are three types of activities to look at in this statement, which are cash flows from operating activities, investing activities, and financial activities (3, 2005).
Cash flow statements provide essential information to company owners, shareholders and investors and provide an overview of the status of cash flow at a given point in time. Cash flow management is an ongoing process that ties the forecasting of cash flow to strategic goals and objectives of an organization. The measurement of cash flow can be used for calculating other parameters that give information on a company 's value, liquidity or solvency, and situation. Without positive cash flow, a company cannot meet its financial obligations.
Therefore, the amount of profit obtained is somewhat arbitrary. However, cash flow is an objective measure of cash and it is not subjected to a personal criterion. Net cash flow is the difference between cash inflows and cash outflows; that is, the cash received into the business and cash paid out of the business (Fernández, 2006). Whereas, net profit is the figure obtained after expenses or cost of resources used by the business is deducted from revenues generated from the business operations activities. Nonetheless, the figure for revenue and cash are not entirely cash, some of the items may be sold on credit and some of the expenses are not paid up
The financial report gives relevant information about a company and is presented in a manner that is easy to understand. When analyzing a company there are certain factors to look for and they are: the background of the company, how well the company is currently functioning, short term liquidity of the firm, the capital structure of the firm, profitability of the firm, and operating of the firm. The financial statement provided by a company gives shareholders, investors, upper management, and loan officers a look into the company, and gives insight into the cash flow, operations, and how well the company is making a profit for its investors and shareholders. This statement is very important so investors, shareholders, and loan officers can get insight into their investment. This also can help give vital information to show loan officers if the company can pay back any loans or give investors and shareholder information if they can get a return on their investment (Tracy, 2014).
The management of cash is essential to the survival of any organization. Managing an organization’s financial operation requires knowledge of the economy and ways to maximize revenue. For any organization to operate on a daily basis adequate cash flow is required. Without cash management the organization will be unable to function because there is no cash readily available in case of inconsistencies in the market. Cash is also needed to keep the cycle of the company’s operations going.
Smaller companies are much more likely to obtain an attentive audience with a commercial loan officer after the start-up phase has been completed. In determining whether to extend debt financing--essentially, make a loan--bankers look first at general credit rating, collateral and your ability to repay. Bankers also closely examine the nature of your business, your management team, competition, industry trends and the way you plan to use the proceeds. A well-drafted loan proposal and business plan will go a long way in demonstrating your company's creditworthiness to the prospective lender.