Elmer Corp. has approached your firm for a loan. They are pursuing a 5 yr loan intended to support the expansion of their operations. Elmer Corp. is a very well established and a very highly regarded firm in its industry. But it is a brand new customer for your firm and you have little understanding of their business. Before preparing a full analysis, what key information do you need to obtain & understand?
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The first thing to understand with a new customer is the type of business they are involved. Since Elmer Corp. is unfamiliar, a three-tier education program would need to be arranged to understand their business model. First, open-source research using the internet and trade publications should be conducted to get a handle on the business. Secondly, an introduction by Elmer Corp. into their particular model will help solidify how they operate in their market. Finally, researching other companies in the same industry will help present a picture of how Elmer Corp. stacks up in the marketplace.
Once the business is understood, there are five main areas of concern to be addressed. The credit history of the business will be a concern. If Elmer Corp. is already well established, then why the need to come to a new loan institution? Certainly not a deal-breaker, but there should be some investigation into if the loan has been turned down by a more familiar institution. The cash flow of the business will need to be investigated. Since Elmer is expanding, what research have they done that makes them assume the market will handle the expansion? What collateral will Elmer Corp. be providing? Real property, for example, is much easier to foreclose on than accounts receivable. Finally, the character of the business owner and financial documentation need to be in order before considering the loan.
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