Role of Financial Statements in Determining Your Borrowing Capacity

Introduction

The goal of financial statements is to convey information about an organization’s operating results, financial status, and cash flows. Each of the financial statements has a particular purpose at a more detailed level. The income statement tells the reader about a company’s ability to make money. Depending on how spending data is pooled, it also indicates the amount of sales and the nature of various sorts of expenses. The income statement can also be used to assess trends in company operations when looked over multiple time periods.

Financial Statements and Debt Capacity

The balance sheet’s objective is to tell the reader about the present state of the business as of the balance sheet’s date. This data is used to determine an entity’s liquidity, funding, and debt position, as well as to calculate a variety of liquidity ratios. Finally, the statement of cash flows is used to show the nature of cash receipts and disbursements in various categories. Because cash flows do not always match the sales and expenses recorded on the income statement, this information is quite useful.

For planning considerations, knowing your company’s debt capacity is critical. Capital is required for expanding your business, making a smart acquisition, and financing ongoing operations. Knowing how much debt your firm can properly take on assists you to prepare successfully for how you’ll meet your finance needs.

Debt capacity refers to a company’s ability to take on debt, or the total amount of debt it can take on to fund asset purchases, business operations, increased return on investment, increased production, and so on, as well as repay lenders (according to terms of the debt agreement). The balance sheet and cash flow statements are two important indicators of a firm’s debt capacity.

The Debt to EBITDA Ratio is the most frequent cash flow statistic used to assess a company’s debt capability. The idea behind this ratio is that for a given amount of debt in the numerator, dividing EBITDA by this amount gives us an estimate of how long it will take a company to repay the debt.

In general, the larger a company’s EBITDA, the greater its debt capacity. However, while determining a company’s debt capacity, the stability of its EBITDA must be taken into account.

When advantageous interest rates become available, having available borrowing capacity helps your organization to take advantage of them. It also offers financing choices that allow you to choose the most advantageous option, whether it’s taking on more debt or raising more equity.

Also Read:- SMEs Financing: Access to diversified financial instruments

Conclusion

A lender looks at three financial reports when evaluating your company’s overall financial stability: profit and loss statement, cash flow prediction, and corporate balance sheet. All three financial records must demonstrate a positive trend in order for the loan application to be approved.

Financial institutions evaluate your company’s financial data to figure out how much money they should provide, as well as the interest rate and repayment terms for a business loan. This evaluation basically assists them in determining the risk of lending to your organization.

Oxyzo seeks to turn small and medium businesses into major corporations, and it provides financial solutions tailored to help SMEs grow their operations, revenue, and profit margins. Oxyzo is a major financing choice for SMEs in India, because of its low-interest rates, collateral-free credit options, and 72-hour loan processing deadlines.