Question

Monica Orgeta, president and owner of Star Enterprises, applied for a $250,000 loan from Carmel National Bank. The bank requested financial statements from Star Enterprises as a basis for granting the loan. Monica has told her accountant to provide the bank with a balance sheet. Monica has decided to omit the other financial statements because there was a net loss during the past year.

-Is Monica behaving in a professional manner by omitting some of the financial statements?

-What types of information about their businesses would owners be willing to provide bankers?

-What types of information would owners not be willing to provide?

-What common interests are shared by bankers and business owners?

-As the loan officer for Carmel National Bank, would you accept only the balance sheet in considering lending funds to Star or any business?

Answer 1

Firstly, we should know about what all included in Financial statements:

• Financial statements are reports prepared by a company’s management to present the financial performance and position at a point in time.
• A general-purpose set of financial statements usually includes balance sheet, income statements, statement of owner’s equity, and statement of cash flows.

• These statements are prepared to give users outside of the company, like investors, bankers and creditors, more information about the company’s financial positions.
• Monica's decision of omitting some of the financial statements is unprofessional as she is obliged to provide all the companys financial position to banker.
• Generally, owners will be willing to provide only the information from which they will be granted more funds, For eg : If Cash flow statements are looking good, then thry will be interested to provide CFS.Similarly, if company had taken any cost reduction procedures, reports of those procedures, proposed funds investment, casf flow and fund flow from propsed loan for futire years, return on such funds, companys capability to repay such loans etc...which will help in procuring more funds to the company.Goodwill, brand value, BCP Plan are the other things which company wishes to disclose to show its going concern ability.
• Infact, companies dont want to disclose those information which wil reduce the company's ability to procure loan . For eg : Loss incurred in past year, contigent liabilities with more certainty, negative cash balance , fees and penalties etc. This will reduce the company's reputation as well as company's ability to repay funds.
• COMMON INTERESTS SHARED BY BANKS & OWNERS :
• Reduced Risk : As a business owner, company may also attempt to reduce your risk, by purchasing appropriate insurance, proper maintenance of tools and machinery and careful evaluation of potential expansion moves. Demonstrating prudent business practices along with solid personal credit and a good business plan may tilt the banker's decision in your favor when considering a loan application.
• Reliable Revenue Sources: As a business owner, you strive to establish reliable sources of revenue. Banks also desire reliable revenue streams, sometimes through imposing fees on customer accounts and transactions, but also by offering services designed to attract customers, such as high-interest certificates of deposit or dedicated personal bankers. Many banks also waive fees under certain circumstances, especially for customers who utilize multiple services -- such as savings or checking accounts, lines of credit and CDs -- with the same financial institution.

• Repeat Business:

  Business owners, relish developing new business, repeat customers may be your bread-and-butter. Repeat customers are not only a source of regular income, but may also attract new customers to your business through favorable word-of-mouth to family and friends. Likewise, many banks cultivate their customers to establish long-term relationships. This is especially true with community banks or locally based credit unions.

  Return on Investment :

  When a bank extends a loan or a line of credit to your business, it is investing in your ability to repay the financial obligation -- with interest. Similarly, when you invest in a new computer network, open an office or shop in a new location or hire additional staff, you are investing with the hopes of receiving increased revenue and profit for your business.

• As the loan officer for Carmel National Bank, I would NEVER accept only the balance sheet in considering lending funds to Star or any business. I would like to grant the loan only after analyzing all the financial statements of past 3-5 years, current year and also proposed financial statements along with project plan and other documents.

Thank you.