Question

Suppose that you own and operate a company. You need to raise money to expand your operation, so you approach a bank for a loan. The loan officer has asked you for your company's financial statements.

a. What items on your financial statements would be of the most interest to the loan officer?

b. Develop two questions that you think the loan officer would be trying to answer by looking at your financial statements.

Answer 1

A loan officer/ banker always wants to verify the credibility of a loan seeker. Most importantly financial data of some periods helps a lot. Financial statement consist of Balance sheet, profit and loss statement,cash flow statement. Some important items of that are given below which may give a lead to the banker to decide whether to sanction a loan or not.

i. Before tax Average net profit and cash profit.

ii. Net operating cash flows from cash flow statement.

iii.Estimated Debt coverage ratio if the loan is sanctioned.

iv. Current and projected Debt equity ratio.

v. Banker would be interested on net working capital, current ratio, quick ratio, debtor turn over ratio if Cash credit is being availed.

vi. Firm's Statutory obligations.

vii. Depreciation and amortisation policy.

Questions banker may ask after looking into financial statements.

i. May ask for valuation report of Fixed asset.

ii. May ask why such deviation in year to year gross profit.

iii. How interest will be paid if a profit won't favour.

iv. May ask for Audited statements if not audited.