Business enterprises range from unincorporated to incorporated forms of business units. Finance is the major issue for consideration when starting up any type of business. Realizing the true potential of a business idea may be difficult when the owners of or proprietors of the business are not in a position to raise the necessary amount of capital required to start the operations of the business. Small business persons face unique challenges that limit their access to funds. The increasing number of small businesses requires special treatment when soliciting for loans.
Financial ratios are very important figures that can be used to evaluate loan applications for small businesses. The two most important financial ratios that affect small businesses include the liquidity and profitability ratios. Liquidity ratios are indicative of the ability of a business entity to take care of its present obligations at the time that they have to be get paid. Examples include the current ratio and acid test ratio. It is also important that small businesses exhibit stable and consistent levels of profitability that may be reflected by favorable gross profit margins or net profit margins for instance.
Apart from the financial ratios, the small business persons should be operating businesses that are legally acceptable. This means that these businesses must have licenses and permits that validate their legality. Loans should not be offered to businesses that are unacceptable under the laws of the land. The risks associated with the business should also be assessed. The risks involved with business should fall within the acceptable levels.
If loans are being provided to a large business instead, some factors will vary from those considered for businesses that are small in size. For example, large businesses usually apply for loans of colossal amounts. This means that the risk associated with offering such loans increase. As a result, large businesses will be required to provide relatively more collateral in order to secure the loan amount. This means that the gearing ratio acts as an important financial ratio particularly for companies that are large. Before approving a loan, the ratio of the owners’ stock of capital to the amount that is to borrowed is an essential point of consideration.
In conclusion, the requirements for loans vary depending on the magnitude and size of the business. It is important to carefully assess the ability of both small businesses and large companies to repay the loans before they can be approved.
References
Brigham, E. F., & Houston, J. F. (2004). Fundamentals of financial management. Mason, Ohio: Thomson/South-Western.
Kormendi/Gardner Partners, & United States (2003). An exploration of a secondary market for small business loans. Washington, D.C.: SBA Office of Advocacy.
