Lenders utilize Credit/Financial Analysis in conjunction with cash flow analysis to determine a business’ financial history and overall financial strength.

Typically, a lender will obtain a business credit report, such as a Dun and Bradstreet Business Information Report, for an overview of a business’ credit history. A report such as this will typically provide a classification of the business which is determined by its size and its payment history with trade creditors. The report may also reflect any outstanding liens and judgments or pending lawsuits which may adversely impact the current or future prospects of the business and will provide a brief history and description of the business. Aside from an obvious reflection of weak financial performance, a poor repayment history on business debt may also be representative of lack of management ability and/or character, which is discussed further under Character/Management.

A lender will also obtain a personal credit report to see how much personal debt the primary owner of the business is carrying and his/her payment history on personal debt obligations. In doing so, a determination can be made as to whether or not the business’ owner is taking an adequate salary to cover his/her personal debt obligations. If the owner is not taking an adequate salary, then cash flow of the business may be reduced accordingly. On the other hand, if the owner is taking a more than adequate salary, then a positive adjustment may be made to cash flow. Poor payment history on personal debt obligations may also be representative of poor management ability or character which is discussed further under Character/Management.

Lenders perform financial analysis on a business in an effort to assess and identify financial strengths and potential or existing financial weaknesses not necessarily reflected by a business’ repayment ability or credit history. A lender will usually perform financial analysis on three full years of financial statements and if applicable, a current year interim financial statement dated within sixty to ninety days. Projected financial statements may also be included in financial analysis.

Financial analysis involves calculating financial ratios from items on a business’ balance sheets and profit and loss statements. Current performance can be determined for a variety of financial measures and improving or worsening trends can be revealed. Some financial ratios can also be compared to industry standards for the business obtained through publications such as The Risk Management Organization or RMA (formerly known as Robert Morris Associates) Annual Statement Studies. This allows the lender to compare a business’ performance to its industry.