Question

You evaluate loan requests as part of your job at Eastwood National Bank. One loan request you received is from Surfer Dude Supplies, a small company. Richard Tracy, the CEO, is requesting $105,000 and brings you a trial balance (or statement of accounts) for his first year of operations ended December 31.

While you are willing to work with Richard, how would you explain to him that a complete set of financial statements from his accountant would be more useful for evaluating the loan request?

Answer 1

To service a loan, there are two payments-principal payment and interest payment. To be able to see the capability of regular payments, one needs to see recurring income and whether the income is locked in the form of receivables or somewhere else- in other words, the cash flow generated. And if the person is not able to fulfil debt obligations, then is there enough collateral which could be sold to service the debt. Hence, to be able to comment about the serviceability of the loan, one has to see recurring income, cash flow and balance sheet that is all the complete set of accounts are required to evaluate the loan request.