The three main credit bureaus maintain useful websites with examples of their bu

Question

The three main credit bureaus maintain useful websites with examples of their business and consumer reports. Log on to www.equifax.com and look at the sample report on a small business. What information do you think would be most useful if you were considering granting credit to the firm? Why or why not would you grant credit to the company The three main credit bureaus maintain useful websites with examples of their business and consumer reports. Log on to www.equifax.com and look at the sample report on a small business. What information do you think would be most useful if you were considering granting credit to the firm? Why or why not would you grant credit to the company

Explanation / Answer

Whether you are applying to a bank for a line of home equity credit, a line of credit for business working capital , a commercial short-term loan, an equipment loan, real state financing, or some other type of commercial or cosumer loan, many of the same basic lending principles apply. The most fundamental characteristics a prospective lender will want to examine are :

- credit history of the borrower

-Cash flow history and projections of the business

- collateral that is available to secure the loan

-character of the borrower

-loan documentation

CREDIT HISTORY

Commercial credit :Before you apply for commercial credit , you should review a credit report on your own business, if your business have been in existence for a while.

Most conventional lenders will expect a minimum four or five trade experiences listed on a business report before they consider the business's creditworthiness.

It's often a wide decision to obtain credit on yourself and your business before you apply for credit.

CASH FLOW

The cash flow from your business's operations-the cyle of the cash flow ,from the purchase of inventory through the collection of accounts receivable-is the most important factor for ontaining short-term debt financing. A lender's primary concern is whether your daily operations will generate enough cash to repay the loan. Bank might consider an acecptable working cash flow ratio.Inpreparing cash flow projections for newer businessess, you may want to refer to any one of several sources that publish sales/expenses ratios for specfic industries.However, the most important component to alender is simply whether the business ongoing sales and collections represent a sufficient regular source of cash for repayment on a loan.

COLLATERAL

Collateral as property that secures a loan or other debts, so that property may be seized by the lender if the borrower fails to make proper payment on the loan.In order to ensure that the particular collateral provides appropriate security, the lender will want to match the type of collateral with the loan being made. Because a creditor want to have a priority claim against the collateral being offered to secure the loan, the creditor will search the public records to make sure that prior claim have not been field against the collateral.

CHARACTER

The weight given to a lender's assessment of a borrowers character can vary tremendously between lending instititions and between individual lending officers. In additions, evidence of a borrowers care and effort in the business planning process suggest that the borrower is committed and cnfident about the new business proposals.

LOAN DOCUMENTATION FOR START UPS

- A personal financial statement and personal federal income tax return for one to three years

- Projected startup cost estimates

- Projected balance sheet and income statement for at least two years

- Projected cash flow statment for at least the first 12 months

- Evidence of ownership interests in assets ans collateral

- Abusiness plan

- Submit a breakeven analysis

LOAN DOCUMENTATION OF A EXISTING BUSINESS

- Income staement and business balance sheets for the past three years

- Projected balance sheet and income statement for two years

- Projected cash flow statement for at least the next 12 months

- Personal and business tax returns for the last three years

- A business Plan

For short-term debt, the cash flow statement and projected income and balance shhets will be most relevant.The lender will dictate the repayment term of your loan, but your explanation of the source of the funds for repayment and how you will manage your overall debt will be crucial to the lender.In that situation lender rely heavily upon certain financial ratios, such as debt-equity ratio, quick ratio and current ratio, etc., in assessing the creditworthiness of a prospective borrower.

However the borrower's performance of the above required necessary information report , documentation, ratios are not satisfactory for loan granting credit, the lender may not grant credit to the company.

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