More advanced commercial lenders might find it a good refresher. It is also appropriate for small business owners and managers who would like to understand how the bank will be making lending decisions regarding their borrowing needs. Banks lend funds to companies to help resolve the timing difference between the need to expend funds and the later receipt of funds through collections of sales.
All loans present some degree of risk as no one can accurately predict the future.
However, forecasting the timing and adequacy of the receipt of funds can minimize the risk. Demonstrated performance in the past in the adequacy of cash flow and the timing of the cash cycle will not guarantee future performance, but it is the best indicator available to forecast the future. Bankers rely heavily on this past performance, however, not without emphasis on factors that might alter that performance. The cycle must begin again by putting that cash back into inventory. Businesses do borrow for working capital to carry higher levels of inventory and receivables through seasonal increases in volume or a special increase due to a large contract.