Whether you are in the start-up phase of business or the expansion phase, there will come a time when you will consider getting a business loan to help with cash flows or to purchase equipment, if you have not already. This blog will provide you with information that will help you be the most prepared when you do. 

The loan process typically begins with a banker's analysis of financial statements that have been prepared by a CPA, and a personal financial statement.  The personal financial statement is typically used to determine if you will be able to personally cover the loan, should your business fail to repay it.  

There is a vast amount of information that can be obtained from a company’s financials and understanding how they’re being sized up will help you make the necessary improvements to your business BEFORE applying for a loan:

Balance Sheet - This statement lists the assets, debts, and the equity of the business.

1. Does the business have enough current assets (i.e. cash, inventory, accounts receivables) to pay its current liabilities (current debt due to be paid in a year)?
2. How much money has been invested by the owner? This tells them how vested you are in your own business.
3. What is the make-up of assets which could be used as collateral for a loan (i.e. property, plant, equipment, inventory, etc.)?

Income Statement - Shows the revenues, expenses, and net profit the business has generated over a certain period.  

1. What is the average amount of revenues generated by the business and is it sufficiently covering the operational expenses?
2. Is the business operating at a profit or a loss?
3. What are the direct costs being incurred to generate the current level or revenues? How much revenue is left over for indirect costs?

Cash Flows Statement

Shows how much cash has been generated from operations and how it has been used: has the company reinvested it back into the business through major purchases of fixed assets or has it given it back to the shareholders or business owner.

Financial Ratios - performed on financial data gathered from any combination of financial statements and can provide even more in-depth information that helps to determine the overall health of your company.

These financial ratios can answer the following questions: 

1. How many days does it take for the business to collect money from its customers?
2. How long does it take to turn inventory into cash?
3. What is the ROI on assets purchased by the company?

In closing, understanding what your financial statements are saying about your business prior to submitting them to a banker will help you get ahead of questions you may be asked.  Even more than this, understanding your financials helps the business owner make better decisions for the business and create a business strategy to fix any problem areas identified with such an analysis.

Some other blog articles that may be of interest are:

4 Reasons You Need a CPA

Which Business Structure Should You Choose