While equity is commonly used to fund these shortfalls, debt can also be used. For example, a toy company may borrow to cover operating cash shortfalls from January until October. As with seasonal companies, highly cyclical companies may borrow during recessions to cover shortfall. Analyzing start-up, seasonal and cyclical companies will be covered in detail when we look at business risk issues. So, the first step in credit analysis is to figure out what the potential borrower is going to do with the cash.
All companies know that bankers lend money to finance capital expenditures and working capital.
The answer, of course, is yes. All of the uses of funds listed above, under the right circumstances, are good reasons to borrow money and bankers regularly lend money for all of them. However, it is important to identify the need so that you can properly focus your credit analysis. The key is for assets to be converted to cash. If inventory is sold under normal credit terms, a receivable is created.