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.
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).
...e an income statement needs to be looked at to show if the business is making a profit and if the expenses are too high or what has change in revenue from year to year. This is just an example of many other sources need to be looked at before deciding on the financial position of the entity.
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
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.
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.
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...
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.
Ratios traditionally measure the most important factors such as liquidity, solvency and profitability, as well as other measures of solvency. Different studies have found various ratios to be the most efficient indicators of solvency. Studies of ratio analysis began in the 1930’s, with several studies of the concluding that firms with the potential to file bankruptcy all exhibited different ratios than those companies that were financially sound.
In the absence of such situation, the financial position in respect of the firm’s liquidity may not be satisfactory in spite of a satisfactory liquidity ratio. Working capital management policy has a great effect on a firm’s profitability, liquidity and its structural health.
Access to capital and credit at various stages in the business life cycle is identified as the major hurdle by the entrepreneurs. For many small firms and most start-ups, the personal funds of the business owners and entrepreneur and those of relatives and acquaintances constitute as the major source of capital. For many small businesses, especially during the early years of their operation, credit is simply not available. For many others, the limited available credit is not through bank loans. Due to this many of them rely on multiple credit card balances and home equity loans as major sources of credit for start-up firm. Because banks are bound by laws and regulations to prudent lending standards that require them a risk management assessment for each loan made. These regulations were made more vigor during the late 1980'' and early 1990 . Banks always found that lending to manufacturing firm with hard asset such as property, equipment, and inventory has always been easier than lending to today's expanding service sector firms. Because the service sector firms own few hard asses, therefor lending judgment have to be based in terms of character, markets, and cashflow, which make it difficult to the bank to meet the regulations for the approval of the loan. Additional, the banking industry, as well as the entire financial sector of the
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.
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.