Before a bank or any other lending agency will lend you money, the loan officer must feel satisfied with the answers to the five following questions:
- What sort of person are you, the prospective borrower? By all odds, the character of the borrower comes first. Next is your ability to manage your business.
- What are you going to do with the money? The answer to this question will determine the type of loan, short or long-term. Money to be used for the purchase of seasonal inventory will require quicker repayment than money used to buy fixed assets.
- When and how do you plan to pay it back? Your banker's judgment of your business ability and the type of loan will be a deciding factor in the answer to this question.
- Is the cushion in the loan large enough? In other words, does the amount requested make suitable allowance for unexpected developments? The banker decides this question on the basis of your financial statement which sets forth the condition of your business and on the collateral pledged.
- What is the outlook for business in general and for your business particularly?
Adequate Financial Data is a Must-
The banker wants to make loans to businesses which are solvent, profitable, and growing. The two basic financial statements used to determine those conditions are the balance sheet and profit-and-loss statement.
The former is the major yardstick for solvency and the latter for profits. A continuous series of these two statements over a period of time is the principal device for measuring financial stability and growth potential.
In interviewing loan applicants and in studying their records, the banker is especially interested in the following facts and figures:
General Information-
- Are the books and records up-to-date and in good condition?
- What is the condition of accounts payable?
- Of notes payable?
- What are the salaries of the owner-manager and other company officers?
- Are all taxes being paid currently?
- What is the order backlog?
- What is the number of employees?
- What is the insurance coverage?
Accounts Receivable-
- Are there indications that some of the accounts receivable have already been pledged to another creditor?
- What is the accounts receivable turnover?
- Is the accounts receivable total weakened because many customers are far behind in their payments?
- Has a large enough reserve been set up to cover doubtful accounts?
- How much do the largest accounts owe and what percentage of your total accounts does this amount represent?
Inventories-
- Is merchandise in good shape or will it have to be marked down?
- How much raw material is on hand?
- How much work is in process?
- How much of the inventory is finished goods?
- Is there any obsolete inventory?
- Has an excessive amount of inventory been consigned to customers?
- Is inventory turnover in line with the turnover for other businesses in the same industry- or is money being tied up too long in inventory?
Fixed Assets-
- What is the type, age, and condition of the equipment?
- What are the depreciation policies?
- What are the details of mortgages or conditional sales contracts?
- What are the future acquisition plans?