Английский язык. Практический курс для решения бизнес-задач

Capitalis the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Prospective lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding .

Collateral or guarantees are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan. A guarantee, on the other hand, is just that – someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender also will consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the general impression you make on the potential lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience levels of your employees also will be taken into consideration.

Financial Analysis

In addition to the «Five C’s», a prospective lender will use four primary financial statements to make a credit decision.

A Personal Financial Statement.

Indicates your net worth. Each partner or stockholder owning a substantial percentage (for example, 20% or more) of the business should submit one. A personal financial statement is important to the lender, particularly if you have never received financing for your business before, because it gives the lender evidence of personal assets you could pledge to secure a loan.

A Balance Sheet.

Provides you with a snapshot of your business at a specific time, such as the end of the year. It keeps track of your company’s assets, or what the company owns (including its cash), and the company’s debts, or liabilities (generally loans from others). It also shows the capital, or equity, put into the business.

A Profit and Loss Statement.

Shows the profit or loss for the year. The profit and loss statement, also called the income statement, takes the sales for the business, subtracts the cost of goods sold, then subtracts other expenses.

A Statement of Cash Flows.

Presents the sources of cash in your business – from net income, new capital, or loan proceeds – versus uses of the cash, over a specified period of time.

It’s at this stage that you will appreciate having an effective accounting system. Without this system, you won’t know if you are profitable or not, let alone if you are liquid enough to pay for the next order of merchandise. A good system also will help you track your company’s growth and anticipate future cash needs.

Ratio Analysis.

Another tool the lender will use is financial ratio analysis. Ratios permit review of a company’s current financial performance versus that of previous years. An analysis of a company’s financial performance considers the status, changes, and relationships of critical components of a company’s health.

The lender also may use financial ratio analysis to consider how a company is doing when compared to another company. A limitation of such comparative analysis is that different industries are driven by different factors. As a result, the financial ratios of a manufacturer and retailer can be quite different even though both companies may be similarly successful.

Lenders are trained to appreciate both the benefits and limitations of ratio analysis and to consider financial results in the context of the company’s «peer group» of similar companies within its industry.

The following section presents some widely used ratios from four financial ratio categories: profitability, liquidity, leverage, and turnover. Your lender.’s analysis also may include ratios specific to your particular industry.

Profitability

Profit is the compensation an entrepreneur receives for the assumption of risk in a business venture. The profitable business must cover its overhead expenses and generate profits for its owner out of its «after-product-costs» cash.

Gross Profit Margin

One commonly used measure of profitability is gross profit, which is your sales minus your product costs. In ratio form, it is called the gross profit margin.

Operating Profit Margin