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If you are looking for financing for your business to facilitate growth or expansion plans, or to run your business more effectively, your existing lenders or potential new lenders will look at a variety of aspects of your business operations to determine if you will qualify. Here are a few important areas to make sure are in order that can help you secure the money you need.
Accounts receivable – It’s important to monitor your accounts receivable. First, most lenders do not give credit for any accounts receivables older than 90 days. In addition old receivables on your balance sheet indicates that money is still owed to you from customers and can signal to the lender that you may have possible issues related to management processes, product quality, customer disputes or other collection problems.
Obsolete inventory - Lenders will assess inventory for turnover and obsolescence. Turnover is the number of times that you sell your average inventory in a year which indicates how efficiently you operate. Obsolete inventory, also referred to as dead inventory or excess inventory, is inventory that is considered to be at the end of its product life cycle and has not seen any sales or usage in an extended period of time. Issues relating to turnover and obsolete inventory will affect the lenders assessment of systems, management and as a result, your ability to obtain financing.
Customer concentration – If your business relies heavily on a small number of customers this may be a red flag for lenders who may be concerned if a high percentage of revenue come from only a few accounts. The lenders may be concerned about the financial stability of your business if you were to lose any of these key accounts.
Low capitalization - Lenders want to see a healthy level of capitalization, meaning the amount of money you have invested (typically assets less debt obligations to third parties). Lenders want to know that if you experience a period of underperformance, you will have enough equity to get you through the slowdown and still be able to honour your debt obligations.
Turned down for financing or a business loan? Worried about approaching your bank?
If you have already spoken to some lenders about financing or a business loan but were turned down, or if you are worried about approaching your bank because you are concerned about the financial stability of your business, it may be worthwhile consulting with a professional with experience assessing businesses and improving performance. To speak with a BDO professional who specializes in working with businesses and their lenders to find win/win solutions, contact one of our offices.
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