Numbers Must Tell the Story of Success
Your ability to make the lender believe in you is critical to obtaining the loans necessary for your business to succeed. However, the financial statements of your business provide an objective source of information as to past and future financial success.
Lenders want to see that your business will generate enough cash from operations to pay the expenses and the debt service of your business. They look at the number of days it takes you to collect your receivables to see how proficient are your credit and collection policies. They look at the number of days you take to pay your suppliers to determine that you are maintaining good relationships with them and taking advantage of their willingness to provide credit. They assess how fast your inventory sells in to measure the risk of the inventory. They compare your sales level to your total assets, receivables, inventory, and fixed assets to determine your operating efficiency. These techniques with a review your cash flow enable the lender to assess the long-term ability of the business to pay its expenses and service its debt from operations.
However, the past is not always an accurate predictor of the future. In spite of the use of historical evidence to foresee the future, lenders are sometimes wrong in their forecasts. Therefore, the lender looks for a secondary source of repayment. That usually means that assets must be sold in order to repay the debt. The banker will review your financial position to determine your short-term and long-term solvency. They compare your assets to your liabilities in order to measure how much equity exists in these assets. They are concerned with the market equity, the liquidation equity, collection cost, and how long it takes to be repaid. The need for a secondary repayment source is why lenders ask for collateral. Collateral on a loan gives the lender a more timely legal recourse in the event of default.
Lenders use the business financial statements to investigate the probability of repayment. They also use them to compare your business?s operations to other businesses in the same industry. They compare your financial performance to others in order to gain information regarding your management skills. Do you run your business efficiently and effectively? How liquid are you? How much do you have at risk versus your creditors? Industry comparisons give an indication of the quality of the business and its management. Loans are repaid by good managers of financially successful businesses. The lender will assist with the capital necessary for your success, provided they believe in the potential economic success of the business and your ability to make it happen.