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Which Assets & Liabilities on a Balance Sheet Would Be of Interest to the Banker?

Original post by Justin Johnson of Demand Media

Banks will review a company's balance sheet before lending them money.

Banks that lend money to companies have a vested interest in the health of the borrower's balance sheet. A balance sheet is the financial statement that lists the company's assets, liabilities and equity. While all of the items on the balance sheet are important, there are several that are of high importance to a commercial lender.

Contents

Cash

The cash balance that a company has in its banking accounts is a high priority item for lending institutions. A bank will likely be hesitant to lend money to a firm that has little cash, as it portrays a possibility of a cash flow problem. Sole proprietors may be asked by a lender to sign a personal guarantee to secure funding for their business.

Receivables

A company's receivables refers to the amount that is owed to them by their customers as a result of a credit sale. Receivables are considered to be a liquid asset, as they are easily converted to cash within a short period of time. Banks view receivables as a source of short-term cash flow. Additionally, some financial institutions will lend money on a short-term basis to companies, with their receivables serving as the collateral.

Accounts Payable

Accounts payable is a business liability that refers to the amount that a company owes its vendors. Banks are interested in accounts payable because it reflects the ability of a company to repay its financial obligations. The accounts payable aging report shows the commercial lender how old a company's receivables are, which reflects the credibility of the company and its payment ability.

Long-Term Debt

The long term debt of a company is of high importance to a commercial lender. A significant amount of long-term debt reflects an inability of the company to finance its daily operations, or an inability to cash flow purchase its capital assets. The payments and interest related to long-term debt can hamper a business' ability to make a profit.


                   

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About the Author

Based in Somerset, Ohio, Justin Johnson has been writing since 1998. He was a finalist for the 1998 Muskingum County (Ohio) Bar Association Law Day Essay Contest and has also written academic papers on business, finance and political topics. He has a Bachelor of Science in business management from Pensacola Christian College.

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