Financial Statement Lending
Creditor banks traditionally lend money to its patrons through financial statement loans. The strategy centers on the scrutiny of the ratios found in the balance sheet and the income statement of the financial statement. These ratios are often the liquidity ratio, profitability ratio, and the solvency ratio. The configured ratios are also frequently used as the underpinnings for managerial decisions on mergers and acquisitions besides traditional loans (Berger & Udell, 2003).
Liquidity ratios or the current ratio is the link of current assets in excess of current liabilities. To such an extent, the relative amount determines interim debit disbursement competency of a client. This ratio is a clear marker that the client can pay current liabilities through the stream of money generated by current client assets. Typically, this ratio is known as the working capital which apparently also discloses the fact that the finer ratio means finer interim solvency (Hunt, Weygandt, Kieso, and Kimmel, 2003, Berger & Udell, 2003).
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