Before deciding to extend a credit line to a business, it is important to find out if the potential borrower is on solid financial footing. Sometimes lenders discover that a company is not capable of paying back money only after approving a loan or credit.
According to The Motley Fool, there are a number of red flags which may tell you if you are dealing with a business that is insolvent and might even be in danger of bankruptcy.
Insufficient income and excess debts
In general, a business is in trouble if it has more liabilities than assets. This means the company does not have enough money or sellable property to cover its debts. Negative cash flow is another consideration. A company may forecast future revenue, but not enough to pay for all of its expenses.
Failure to make payments
A business that does not pay its vendor bills may lack sufficient capital to cover its costs. This could be an early indication that the business is in financial trouble. If a company fails to pay its workers and service its debt, it is a further sign that the company may head for bankruptcy in the near future.
Previously declined loans
Your bank may not be the first lender a business has gone to for a loan. You could learn that a potential borrower has received credit or loan denials from other banks. Sometimes a business cannot get approval even with a government guarantee.
A company that only exhibits some of these signs might still have enough assets or cash flow to repay a loan. If you decide a borrower is worth taking a chance on, you may insist on a secured transaction to protect your interests.
