If the decision is made to apply to a Bank for a loan or for a credit, the Bank will examine the credit application (that is, the Business Plan) for answers to two basic questions:
- Will the Company be able to pay back the loan?
- What can be done to recover the money if the Company finds itself unable to repay the loan? (i.e. What is the sEurority for the loan?)
Banks differ in their approach to the analysis of credit applications, but in general they will look at the following issues to get their answers (source: K. Vander Velpen, Generale Bank, Brussels):
- Moral standing of the borrower
- Level of confidence and mutual understanding between borrower and Bank
- Confidence in the competence of the management/entrepreneur
- Profitability, cash-flow expectations
- Solvency [(Common stock + retained earnings)/owners equity]
- Liquidity [(current assets - stocks)/current liabilities]
- Likelihood of survival of possible business failures
- Does the borrower understand the financial consequences of his venture?
- Quality of financial planning and financial management
- Completeness of information
- Additional risks [e.g. environmental claims, currency risks, social claims, etc.]
- Quality of the collateral sEurorit?
Note that a Bank's business is to lend money at an appropriate rate of interest; it is not primarily concerned with your profit levels but it is concerned with your Cash Flow, since this affects the Company's ability to service its debt.
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