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. Some business people claim that a healthy cash flow is even more important than your business’s ability to deliver its goods or services! That may be placing a bit too much importance on your cash flow, but consider this ¡X if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors, or your employees, you’re out of business! No doubt about it, proper management of your cash flow is a very important step in making your business successful.
– Understanding cash flow is the first step in effectively managing your cash flow. There’s more to it than just a fancy term for the movement of money into, and out of, your business checking account.
– Analyzing your cash flow will help you spot some of the problem areas in the cash flow cycle of your business. As in any good analysis, you need to look individually at each of the important components that make up the cash flow cycle, to determine if it’s a problem area or not.
– A cash flow budget is good way of predicting your business’s cash flow for the next month, six months, or even the next year. Check out the Business Tools area if you want to prepare a cash flow budget for your business. We’ve taken care of some of the work for you!
– Improving your cash flow will, without a doubt, make your business more successful. Accelerating your cash inflows and delaying your cash outflows are key factors for improving and managing your cash flow. The cash flow budget is also a handy tool to use in the improvement and management of your cash flow.
– Filling your cash flow gaps: from time to time, almost every business experiences the need for more cash than it has. If you find yourself in this position, you may have to borrow money to fill the gap.
– Handling any cash surplus is just as important as the management of money into and out of your cash flow cycle. With the proper management of your cash flow, you might find yourself with a little extra cash, on which you can earn investment income.
Business Credit Evaluation