Saturday, 12 May 2012

Financial Information Required by Lenders

The two basic financial documents that lenders require are the balance sheet and the income statement. The balance sheet is the major yardstick for solvency and the income statement is the common measure of profits. Using these and other sources, lenders ask the following questions.

General Questions

            -          Are the business's books and records up‑to‑date and in good condition?

            -          Does the business have a lawyer and/or accountant?

            -          Who are the customers and what percentage of total sales do the largest customers represent?

            -          Are all obligations paid promptly?

            -          What is the insurance coverage?

Accounts Receivable

            -          What is the quality of the accounts receivable?

            -          Have any been pledged to another creditor?

            -          Are customers paying you promptly?

            -          Is there an allowance for bad debts?


            -          Can the merchandise be sold at full price?

            -          How much raw material is on hand?

            -          How much work is in progress?

            -          How much of production is finished goods?

            -          Is too much money tied up in inventory?

            -          Is the inventory turnover in line with industry norms?

Fixed Assets and Equipment

            -          What is the type, age and condition of the equipment?

            -          What are the depreciation schedules?

            -          What are the details of mortgages or leases?

            -          What are the future fixed asset and equipment needs for the company?

The lender scrutinizes the cash flow of the business to determine whether or not the owner‑manager is providing sufficient cash to meet the firm's obligations. The lender also makes sure that cash needed for working capital is not being diverted to other areas, such as the acquisition of fixed assets, thereby reducing liquidity.

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