FM - Credit [LESSON]

Credit

Introduction to Credit

Banks provide a crucial service in that they lend money to businesses. In this section we will talk about how the bank analyzes the credit of a business when they want to borrow money.

In the early stages of a business, the entrepreneur usually seeks financing from informal investors. Such sources of funding may include:

  • Friends or relatives,
  • Partners,
  • Local development corporations,
  • State and local governments offering low-interest micro loans,
  • Private foundations offering program-related investments,
  • Credit unions featuring small business lending, and
  • Universities with targeted research and development funds.

Once a business has sufficient profits, the entrepreneur can approach a commercial bank or another traditional lender for a loan. Even at this stage, the entrepreneur will deal with a bank with which he or she has an established relationship.

There are three major reasons why businesses borrow;

  1. The most common reason is to purchase assets. A loan to acquire assets could be for buying short-term, or current, assets—such as inventory—and would be repaid once the new inventory is converted into cash as it is sold to customers. Or, the funds could be for the addition of long-term, or fixed, assets, such as equipment.
  2. The second would be to repay the informal sources of funds used before.
  3. The third would be to buy back equity in the company.

Credit Presentation

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