by Sithambaranathan Prithiviraj

Created on: September 03, 2008   Last Updated: September 27, 2011

Any new business or a existing business which is struggling due to may factors may have to get a loan. It is not very difficult or easy to get a loan from financial Institutions. However, the person who applies a business loan have to satisfy his local bank manager or a credit union manager that the business will be viable in the long-term. As well demonstrates to the bank manager that they have a workable business plan which ensures success in the long-term.

The person who wants the bank loan must be able to give a financial forecast of his cash flow for at least for 2 to 3 years and the reasons for that fore cast and give best and worst case situation and they can survive in all the probable future situations. In addition they also need to prepare cash flow statement to the manager to evaluate whether they have the capacity to pay the interest and the repayment of their loan.

For a small business unsecured loans are more preferable and it can be obtained from even from big banks as they provide credit even to small businesses. However, the small business person also must provide his own capital by selling his possessions or mortgaging his home to show to the financial institution that he or she is committed to the small business venture. In addition small business can also can be arranged from specialized banks which serves the small business only and they may have favorable terms than other institutions. This may save money in terms of interest and the approval time taken to get the funds needed and less paper work.

The discounted cash flow accounting means it takes in to account time value of money. That is the money received now is more valuable than the money receives in the future because the money received in future if received now will not earn the interest if it can be obtained now. That is the cash flow accounting takes in to account the opportunity cost of interest forgone. In this sense if a small business can minimize interest and time of obtaining a loan it benefits in saving lot of interest and cost of obtaining loan.

That is to obtain loan the cash flow statement are vital in the perspective of the bank as well as in the perspective of the business to value its business and to price its business and its viability and solvency. A business can have profitability but it need not have adequate solvency and there fore cash flow statements are vital to obtain loan to evaluate the capacity of the business to repay loan and meet its interest and other charges.

Learn more about this author, Sithambaranathan Prithiviraj.
Click here to send this author comments or questions.