Obtaining Credit in a Tight Credit Market

Even though the economy still appears to be improving, credit remains very tight.  To successfully obtain credit, it is important to have proper financials prepared and/or a personal financial statement on the owner/owners of an organization.

Proper financial statements include a current income statement, balance sheet and monthly cash flow statement.   The income statement should include the previous month, year-to-date as well as prior year-to-date information for the same period.  The balance sheet should include the prior month.  It’s also a good idea to submit the latest tax return for the business.

Lenders will then look for several things on these statements:

  1. Income Statement:  Is the company consistently profitable?
  2. Balance Sheet:  Debt-to-equity ratio should not exceed 2.5-to-1, although banks prefer 2-to-1.
  3. What are the trends in accounts receivable, inventory, margins and accounts payable?
  4. What is the current ratio on the balance sheet?  This measures current assets over current liabilities.  If this ratio is 1-to-1 or higher, it implies there is good liquidity.  If it is below 1, it suggests the company may not be able to meet its current (less than 30 days) cash flow needs.

Lenders review this information to determine if a business can pay the loan back to the lender.  If these ratios are outside the norm, then you’ll need to have a very good explanation as to why, as well as a projection on when you anticipate them returning to acceptable levels.  If your financials indicate higher than normal risks, you will likely have to personally guarantee the note, being fully aware that the bank will look to you personally to repay the loan.

Credit can be obtained by having financials professionally prepared as well as you, the owner, being able to fully understand and explain them.   Not having financials prepared monthly is one of the main reasons companies fail.  How can you know what to improve on in your business if you don’t have a scorecard (financially speaking) to guide you?

 Contact Right Way Medical today to learn more about your credit options.