by Todd Smith
Banks go through a series of thorough analyses before approving a loan, extending a credit line or increasing a customer’s credit profile. They do so to reduce credit risk, monitor debt levels and ensure that borrowers are forthcoming with performance data when they submit financial statements and accounting ratios. Assets play a key role in a bank’s lending decision. Given that assets represent resources a borrower will use to generate cash and repay the bank, loan officers appraise the debtor’s existing assets to determine short-term solvency. Assets are part of a corporate statement of financial position and include customer receivables, cash, merchandise, computer hardware, real estate, and factory equipment. Banks pay close attention to a potential borrower’s liabilities before granting a loan application and evaluate how much money the prospective debtor currently owes and to whom.
Bankers study a corporate borrower’s statement of profit and loss to determine how much the business is generating in revenues. Loan officers pay special attention to revenue items because an adverse change in profitability trends could limit the company’s ability to repay its debts. A statement of profit and loss is also known as a statement of income, P&L, or income statement. Lending officers review a company’s P&L to see how the firm intends to produce income through its existing levels of administrative charges and manufacturing costs. The goal is to determine how the business can steer its operations in an economically sustainable way while curbing excessive spending. The balance may be difficult to strike, as corporate expansion plans and long-term investments generally call for significant expenses. However, without those expenditures, a company could find it difficult to spur sales, innovate and grow market share. For bankers, it’s useful to analyze solvency data from balance sheets and P&Ls, but the ultimate goal is to assess a borrower’s cash flows. By studying liquidity movements, bankers make sure the company has regular inflows of cash and will have sufficient money to pay its liabilities.
Answers provided by Todd Smith, Senior Vice President, Market Executive at Simmons Bank. He can be reached at 314-569-7242 or todd.smith@simmonsbank.com. The views and opinions expressed in this article are those of Todd Smith and are not endorsed by, and do not necessarily reflect the views of, Simmons Bank. Simmons Bank does not provide tax, accounting, or legal advice.
Submitted 2 years 120 days ago