Mind your business assets

By “part of the transaction,” I mean any time any percentage of equity in a business contributes to the loan applicant’s income.

Some people might say, “That’s not fair. The business isn’t buying the airplane. I am.” And that’s the point. The lender must feel comfortable knowing that your income stream will not be choked off should a business you have a stake in suddenly lose its revenue stream or have ballooning expenses.

A P&L is a document that provides a snapshot of revenue versus expenses over a specific time frame—either a calendar year (January to December) or a fiscal year (e.g., August to July). A P&L answers the questions, “What’s the top line you’re making? What’s it costing you to make that? What are all the different pieces in between that you’re having to pay for?” And finally, “What do you get at the end?”

A balance sheet is a summary of the financial balances of an individual or organization. When you take a P&L and a balance sheet together, they collectively create a statement of cash flows. While you can submit a statement of cash flows as part of your package, lenders—like detectives conducting an investigation—will want to form their own opinion.

What they’re looking at are the entity’s assets. Specifically, what are its current assets and noncurrent assets? Noncurrent assets are almost always illiquid assets, such as property and equipment. Current assets are cash and receivables, items that can quickly be converted into cash.

A lender is also analyzing how leveraged the company is—the liability side of the balance sheet. Lenders will look at current liabilities and noncurrent liabilities. Current liabilities are payables and other notes that are due within the next 12 months. Noncurrent is usually defined as anything due more than 12 months out. When you subtract the liabilities from the assets you’re left with the equity that’s in the business.

Finally, lenders will consider how leveraged the business is (liabilities versus equity) in comparison to similar businesses across that industry. A business where there are more liabilities than assets (negative equity) is effectively insolvent. Lenders are loath to lend to anybody associated with an insolvent business.

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