Quora Answer: When a Bank Issues a Commercial Loan, Do They Care More about Cashflow or Recurrent Revenue Streams?

The following is my answer to a Quora question: “When a bank issues a commercial loan to a business, do they care more about cash flow or reoccurring revenue streams?”

Before a bank issues a loan, they need to be satisfied that your business is a going concern, and able to pay the loan.  Alternatively, they have to be satisfied that in the event that the business is unable to repay the load, and action has to be taken, they can recoup the cost through sale of the company, or its assets.

To that end, banks look at recurring revenue streams first.  Revenue is what the company earns through the provision of products and services.  Cashflow is the net amount of cash moving into, and out of the company.  Revenue is the measure of the company’s effectiveness in sales, and marketing.  Cashflow is a liquidity indicator.  The bank may need to examine both to evaluate the financial health of a company, the financial health review.

Revenue is the total income earned by the company before expenses are deducted.  This includes accrued revenue, which is earned for the delivery of goods or services on credit.  This impacts cashflow, but it does not mean the company is not viable.  There is also unearned revenue, which is prepaid before the delivery of goods and services.  Cashflow is an important consideration because the company might be in a position where it cannot deliver.

The cashflow statement shows where the company’s money is coming from, and going.  Aside from cash received from revenue, cash flow also includes sources of income not classified as revenue, such as cash received from the sale of equipment, or realised bad debts.  This means the cashflow may be misleading.  This is why banks look at revenue, particularly recurring revenue.  A cashflow is a snapshot of liquidity at the moment.  The revenue tells the real story of the business’ viability.