Understanding basic credit issues is the first step in determiningwhether or not a client needs, is eligible to apply, or qualifies for financialassistance.
Determining whether the company’s level of debt is
appropriaterequires an analysis of the company’s expected earnings and the variabilityof these earnings, as well as the
ratio between total debt and equity. Strongequity and low
debt levels provide resiliency which will help a firm weatherperiods of operational adversity. There must be careful
examination of thedebt-to-worth ratio of a company. Sufficient
equity is particularly importantto new businesses. Business
loan applicants must have a reasonable amountto invest to
ensure that, along with any borrowed funds, the business canoperate on a sound basis. A strong equity position ensures
that owners willremain committed to their business.
Financial obligations are paid with cash, not profits. When cash outflowexceeds cash inflow for an extended period of time, a business cannotcontinue to operate. As a result, cash management is extremely important.In order to adequately support a company’s operation, cash must be at theright place, at the right time, and in the right amount. A company must beable to meet debt payments as they come due.
Working capital is essential for a company to meet the continuousoperational needs of business. The adequacy of working capital directlyinfluences the firm’s ability to meet its trade and short-term debt obligations,and ultimately its ability to remain financially viable. Working capital is theexcess of current assets over current liabilities. Because working capital isthe excess of the more liquid, working assets over the obligations of a firmwhich are due within one year, it measures the funds available to finance acompany’s current requirements and represents the cushion or margin of protection for a company’s short term creditors.