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Determining the Financial Health of Your Startup When Applying for Loans

1st Jun 2016
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When applying for online small business loans, one of the critical areas lenders look at before approving your request is the health of your business. This is because every lender is cautious on the default risk element and the only way they can cushion themselves is through a business health analysis. This means as the business owner, having the metrics on hand when applying for financing can enhance your chances of not only approved but for the amount you are requesting. Below are a number of areas that together give a picture of the financial health of your startup.

Your Inventory Level

Where your business is commodity-based as opposed to being service-oriented, your inventory forms the first stop over when analyzing the health of your business. When the inventory is excessive, it means a lot of your money is tied up and this may either be a pointer to reduced business activity or improper inventory planning. Also, excess inventory can paint a picture of poor customer service where the time between order placement and fulfillment is unnecessarily experiencing lags. Low inventory levels can also indicate poor sales forecasting or underperformancewhich may jeopardize your online small business loans application.

Accounts Receivable

Accounts receivable being an asset to any business whether a startup or an established entity, performance evaluation experts normally look at this asset class. Where the receivables have aged in the collection schedule, it can mean that the business growth is affected or its debt collection policies are poor. The accounts receivable turnover, cash collection schedules, credit policies, and receivables aging schedule are normally reviewed as a unit to get a view of how prudent the business operations are with regards to its customers.

Net Income

The bottom line of a business is the ultimate cream when measuring its performance. Use net income ratios, the health of your business can be analyzed and its profitability determined. For instance, the gross profit of your startup and the manner in which it relates to your net sales can give a good indicator of how well your business is performing relative to similar businesses in the same industry. Other ratios such as net income to net worth when analyzed together with variables such as total purchase price and interest costs can reveal your likelihood of earning a reasonable return.

Working Capital

This is the difference between your current assets and your current liabilities, at any given time, your business must be having a healthy working capital reserve as this shows your readiness to meet obligations as they fold you. When this ratio is highly unfavorable meaning your current liabilities are much higher compared to your current assets, your business practices may be brought to question.

Sales Activity

This is the meat and bone of business performance analysis. When viewed on paper, sales figures may portray a healthy business contrary to the reality. In health analysis, trends such as the growth in sales due to price change or sales volume are examined together with the nature of the operating environment. If your sales figures have been static, the lender may be interested to know the reason behind it and the plans you have to revamp the numbers.

One of the convenient ways of getting financing for your startup is through online small business loans. They have lesser hurdles compared to the traditional lenders and can listen and help you improve your business health and performance.

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