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Which Financial Statements do Lenders Care the Most About?

What do lenders care more about: your company's income statement, balance sheet, or cash flow statement?

Well, in order of priority, the cash flow statement would definitely be the most important item to look at when undertaking a structured lending transaction. The second-most important item to look at would be the balance sheet, and least important out of the three would be the income statement. Here's why:

  • For structured lending transactions (whether corporate lending or project finance), lenders rely on the actual cash flows generated to repay the debt advanced to a company. If a company is profitable from an accounting perspective, yet has no liquidity at the time when an interest or capital payment is due, the company would default on its interest or capital obligations. The liquidity of a company is captured by the cash flow statement, and in the cash flow models of the company;

  • The cash flow statement in conjunction with the balance sheet allow for a lender to analyze the working capital efficiency of a company. If a company has large amounts of accounts receivable and a low cash balance, yet is highly profitable, the company may have working capital problems. Working capital is the lifeblood of a business, as it is the cash a business requires to continue funding its day-to-day operations. Even profitable business may meet their demise after experiencing working capital problems (not being able to pay suppliers or employees on time);

  • The balance sheet of a company is useful in analyzing the value of the company's assets, if collateral would be taken for its bank loans. Banks assess the risk of loss in a funding transaction by looking at the value of the loan advanced vs the value of the collateral package (loan-to-value ratio);

  • The income statement would add little if any additional information for structured lending transactions, especially if top line revenues and expenses had already been captured in the cash flow statement or cash flow model.

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