Assessing your Business Loans 101

Business Loans 101Business loans are probably the life blood of many enterprise and companies. Without the leverage and liquidity of a business loan, many companies will have difficulty coughing up huge capital to buy raw materials, trade and pay its employees and suppliers. Many small businesses may also experience difficulty and time delay in receiving payments and trying to timely match its inflow of capital to the outflow of payment may prove to be a daunting task for many bosses.

Banks providing financing to fill in this gap, to improve your cash flow and liquidity and provide the life blood that keeps many businesses alive, supports trade and growth of the companies and participate in the growth of the companies by earning the interests that companies and enterprise pay the banks on their loans and mortgages

Today, we take a quick look at some of the factors that banks and financial institutions look at when assessing your business financing application.


Business Cash flow

This tells if you are spending more than what your company earns. It’s only a matter of time that you end up closing shop if your company spends $10,000/month but earns only an income / revenue of $7000/month. The shortfall would simply build and pile up to the extent that you can no longer service the interest as the interest compounds on the interest.

Demonstrate good positive cash flow with some balance of cash equity in the bank account. Having consistent unsuccessful debit deduction of payment may negatively impacts credit assessment as it indicates cash flow issues.


Income of the Directors and the Business

The latest 2-3 years of the directors Notice of Assessment will generally be used to assess the income of the directors while the latest 2-3 years of the financial statements will be used to assess the income/revenue/net profit of the company.


Repayment Ability

Demonstrate strong repayment ability. Cash flow and income are generally good factors for gauging the repayment ability of a company/business or director. In the event that repayment ability may not be evidently strong, providing evidence of good alternative liquid / illiquid assets may help to support the case. Assets may be cross pledge to finance your business facilities and loans and as the lending comes secured against assets, the risk exposure of the bank is sharply reduced.


Financial Ratios - Debt Ratio, Current Ratio and Profit Margin etc.

Financial ratios provde quantitative analysis into your business and help banks better understand your business.

Debt Ratio: Your debt ratio is again very much connected with the repayment ability and the cash flow of a company. The debt ratio is generally computed with your total debt against the total assets of your company.

Debt Ratio = Total Debt / Total Assets

Assuming the debt ratio is 1.3, then it basically shows that for every dollar ($1) the company has in assets, the company holds $1.3 in debts. A company that is highly leveraged with debts with low equity assets may negatively impact the credit assessment.

Current Ratio: Inversing the debts over assets from the debt ratio would form the current ratio. The current ratio provides you with an assessment of your company resources to pay its future bills over the next 12mths.

Current Ratio = Current Assets / Current Liabilities

Assuming your current ratio is 1.25 : 1. A good positive current ratio gives a clean bill of your company financial health. For every dollar in current liabilities, there is a dollar and twenty five cents ($1.25) in current assets.

Profit Margin: The profit margin simply tells how much net profit your company or business is making.

Profit margin = Net income / Sales

Assuming the business sales are $300,000 and the net income is $60,000, then the profit margin of each dollar of sale is 20%. In dollar terms, for every dollar that you sell, you earning revenue net profit of 20 cents.


Company registration and paid up capital

A strong capital paid up demonstrates good financial standing and capital.


Documents required for the application of a business loan are:

  • NRIC of Business owners
  • Latest 2 years of Income Tax Notice of Assessment
  • Latest 2 years financial statements
  • Latest 6 months Bank statements

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