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Published Feb 22, 2022
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What do lenders care more about: your company's income statement, balance sheet, or cash flow statement?
Well, in order of priority, the cash flow statement would definitely be the most important item to look at when undertaking a structured lending transaction. The second-most important item to look at would be the balance sheet, and least important out of the three would be the income statement. Here's why:
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For structured lending transactions (whether corporate lending or project finance), lenders rely on the actual cash flows generated to repay the debt advanced to a company. If a company is profitable from an accounting perspective, yet has no liquidity at the time when an interest or capital payment is due, the company would default on its interest or capital obligations. The liquidity of a company is captured by the cash flow statement, and in the cash flow models of the company;
The cash flow statement in conjunction with the balance sheet allow for a lender to analyze the working capital efficiency of a company. If a company has large amounts of accounts receivable and a low cash balance, yet is highly profitable, the company may have working capital problems. Working capital is the lifeblood of a business, as it is the cash a business requires to continue funding its day-to-day operations. Even profitable business may meet their demise after experiencing working capital problems (not being able to pay suppliers or employees on time);
The balance sheet of a company is useful in analyzing the value of the company's assets, if collateral would be taken for its bank loans. Banks assess the risk of loss in a funding transaction by looking at the value of the loan advanced vs the value of the collateral package (loan-to-value ratio);
The income statement would add little if any additional information for structured lending transactions, especially if top line revenues and expenses had already been captured in the cash flow statement or cash flow model.
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From my POV it would be the income statement - the TIE is a critical thing to consider for a lender to be assured that the borrower can meet the debt service. But that's only the first threshold.
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Well, in order of priority, the cash flow statement would definitely be the most important item to look at when undertaking a structured lending transaction. The second-most important item to look at would be the balance sheet, and least important out of the three would be the income statement.
Lenders will evaluate balance sheets and income statements using a ratio analysis approach. The ratios creditors use typically include debt-to-equity, debt-to-assets, quick ratio, and current ratio but may include others as well, depending on the banking institution.
Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.
A possible candidate for most important financial statement is the statement of cash flows, because it focuses solely on changes in cash inflows and outflows.
The most common ratios are Debt Service Coverage Ratios, Working Capital, AP and AR Turn Days, and Gross Profit Margin vs Net Profit Margin. Here's an explanation of what each of these are and how they impact a lender's perception of your ability to repay a loan.
The cash flow statement in conjunction with the balance sheet allow for a lender to analyze the working capital efficiency of a company. If a company has large amounts of accounts receivable and a low cash balance, yet is highly profitable, the company may have working capital problems.
Answer and Explanation: Creditors are lenders of a company and they are generally interested in the financial statements to get an idea about the credit-worthiness and financial standing of the company. This information helps them make an informed decision about whether they wish to lend money to a particular company.
The most important accounting statement to creditors is the Cash Flow Statement. So they can decide if they are likely to be repaid the loan. if the loan is secured by assets they will want to understand that the assets exist and worth what they expected.
Your income and employment history are good indicators of your ability to repay outstanding debt. Income amount, stability, and type of income may all be considered. The ratio of your current and any new debt as compared to your before-tax income, known as debt-to-income ratio (DTI), may be evaluated.
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