Why is Cash Flow Important?
As one of the 5 C’s of Credit, cash flow is one of the key factors examined and requested by commercial bankers from business loan applicants. Cash flow is predominantly used in evaluating a company’s operating strength and ability to repay debt.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), which can be likened to operating cash flow, is just the starting point for determining a company’s total cash flow. Other activity such as distributions and fixed asset purchases are also considered.
When applying for credit, businesses can be best positioned by demonstrating a track record of strong, repeatable cash flow. Higher levels of cash flow enable a company to ride out economic downturns, allow for the retention of earnings and improvement in liquidity. This strengthens the company’s balance sheet and improves the ability to repay debt.
Tangible collateral offers an alternative method of debt repayment when cash flow becomes inadequate. A guaranty may provide support should a borrower’s resources become diminished. However, commercial lenders seek cash flow as a primary source of debt repayment.
If you are seeking feedback or guidance to better understand the loan application process, Needham Bank’s commercial lenders are available to work with you so that your company can obtain the best rate and terms possible.