Creditors are particularly interested in financial statements of a company. The main reason that creditors attribute to this need is the fact that they need to ascertain that the borrower has not only the will but the ability, and wherewithal to repay their dues. They call it due diligence. By presenting financial statements that prove the ability to repay, a company builds the trust of the creditor who must verify that the borrower deserves that kind of trust and consequently the cash by going through the financial statements meticulously. Should the creditor find a red flag in the financial statement, he has the right to ask for more clarification to serve his curiosity and restore the now eroding trust. In the business of money, it is has to be seen to be believed. Creditors will majorly look at the following types of information.
A creditor will especially be interested in current and debt-to-equity ratios. The current ratio will give a creditor a feel of how many times the most liquid assets overpass the most demanding liabilities. This ratio will tell the creditor if the business is already drenched in debt. Debt-to-Equity ratio will tell the creditor the relative proportion of owners’ equity that has been used to finance assets. This ratio will inform the creditors if the business is capable of financing its debts using its owners’ assets in the case of a dissolution.
Source of repayment
Financial statements inform creditors on where the business is likely to generate the cash to repay its additional debt. Most specifically, the cash flow statement will be useful in detailing to the creditors how the previous cash flow has been generated and as such, the creditor can estimate if the same trend can finance another loan.
Collateral existence and value
In the case of a secured loan, the creditor needs assurance that such a securing asset that the business claims to have is actually existent and if the same is there, its value. As such, when the business fails in meeting its obligations, the creditor is at liberty to liquidate such assets and recover their money. The information is present on the assets section of the balance sheet.
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