Are You Bankable ~ What Does Your Cash Flow Tell Lenders About Your Business
As a business owner, your cash flow is a significant indicator of your company’s financial health and cash position from one period to the next. Managing the cash inflows and outflows within your operating, investing, and financing activities are very important for making sound decisions. Lenders assess your cash flow statement to observe the changes within those inflows and outflows to rate your ability in repaying your potential loan. Your business must be able to present stable or positive cash flows for at least three to five consecutive years. The obligation to make your loan payments on an ongoing basis restricts your free cash flow to invest in growing your business and provides insight on the flexibility of your future cash flows, if there is an emergency.
For many companies accounting is a top issue, and preparing sound financial statements can be problematic. Balance sheet accounts and elements of the income statement are used by banks to access their risk. It is important to stay current on all payments, invoices, and tax liabilities to prevent any setbacks within the loan process.
Besides your profitability, the 5 Cs of credit are key in determining whether your business is bankable:
- Character (credit history) – a subjective measure of your willingness and ability to repay the loan, based on your personal credit history, (FICO) score and credit report, which provides the names of lenders that have extended credit to you, types of credit you have, your payment history, and your personal financial strength as a means to help understand how reliable you have been in repaying past your past debts.
- Capital – is a measure of the borrower’s investment in the business such as initial cash infusion, retained earnings, or other assets of the business owner. Your personal investment is what can make your business more favorable.
- Capacity – determines your financial capacity to manage repaying your loan, based on the historical cash flows, debt service coverage, and debt to income Ratio generated by the business.
- Conditions – a measure of the environmental and economic conditions that may affect your company’s ability to repay your loan.
- Collateral – lenders can secure your loan by the value of assets such as buildings, automobiles, equipment, CDs, or savings accounts ect. to help in determining their lending decision; they must have some recourse in case you default on your loan.
The PMC Team