Business Credit Evaluation Essay
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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?" — Unknown
The cash flow from your business's operations — the cycle of cash flow, from the purchase of inventory through the collection of accounts receivable — 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 — the amount of available cash at any one time in relationship to debt payments — 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...
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