Tuesday, September 25, 2012

3 Essential Reports to Support Your Business Loan Application (2nd of a 3-Part Business Loan Series)

3 Essential Reports to Support Your Business Loan Application (2nd of a 3-Part Business Loan Series)

Is your business financially healthy? There are three important reports that tell the state of your financial health and your bank will be looking at these reports closely to decide on the fate of your loan application:

Balance Sheet:

The bank will be looking for some solid fixed assets such as factories and machinery in the running of your business. There are also inventories and cash balance in the bank as indicated in your current assets. If your current liabilities such as amount owing to creditors are more than your current assets. It raises a red flag.  It indicates that you may have an insufficient cash flow to pay outstanding debts. The other thing your bank will take note is an item called amount owing by directors. It indicates that the fund has been drawn out for personal purposes. A bank will think twice lending money to a business entity with such an item in the balance sheet.  The bank is only interested to provide loan for business purposes only.

Income Statement:

The bank is interested to know if your business is able to generate profit from your revenue or sales because:
Sales - cost of sales - business expenses = profit.     
 Is there growth in your business as indicated by the increase in sales year after year? Is your gross profit percentage (when a sale is $100 and the cost of sale is $70, your gross profit is $30 or 30%) in line within the industry?  Is your business incurring more than necessary expenses? Poor control of operating expenses is an indication of poor business management.       

Cash Flow Statement:

When a business is making a profit, it is not an indication that everything is fine. You may be running short of fund to finance the business:

·         You are unable to collect the outstanding amount from your debtors (customers that you have given credit facilities)
·         Money spent unwisely like purchasing too many company vehicles for directors.
·         Fund transfers out by directors.

The bank is looking for a healthy cash flow from various activities such as business, investment and finance.

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