As a lending institution a bank wants to be assured that the funds requested will be spent as stated in the loan application, e.g. funds requested for an expansion of a plant will not be diverted to covering operating cost of the business, thus reducing the liquidity of the enterprise. Short-term loans, repayable within a year, are usually earmarked for improving sagging sales and are expected by the bank to be self-liquidating, i.e. they will be repaid from sales revenue, by contrast to long term loans which are repaid from accumulated profits. An applicant for a short term loan has to produce sound evidence of his ability to repay by showing this past sales pattern and his cash flow records. A business owner wanting to borrow a long-term loan must present his past financial statements as records of his performance or a comprehensive realistic business plan complete with a repayment schedule and backed by solid collaterals.

Either requirement calls for good planning. A cash forecast should help convincing the lender that the borrower’s repayment plan is feasible and a cash budget should indicate the availability of funds to operate the business throughout the term of the loan. While cash requirements differ from business to business at SCORE we feel that a small business should have five to ten percent of a firm’s working capital in cash in order to avoid occasional cash crises. A SCORE counselor might be able to help in preparing a loan application, in determining how much cash the business actually needs and possibly even reduce the size of a bank loan by making better use of trade discounts and by negotiating with suppliers.