Finance Statements For Lending Decisions

Reviewed by Fallon Han· Updated 2026-06-01 06:07:29.999

This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.

Can you connect the three financial statements to a lender's view of repayment ability? I'm a third-year accounting student in Australia on a temporary graduate visa, and I want to think like someone in corporate banking at a universal bank.

Yes. A lender mainly asks one question: can this business generate enough cash, consistently and in the right timing, to repay debt on schedule? The income statement shows profitability, but profit alone is not repayment. It tells you whether the business can earn before interest and tax, which supports debt service over time. The balance sheet shows the capital structure and working capital. A lender looks at liquidity, leverage, and short-term obligations to see whether the firm is overextended or has cushion. The cash flow statement shows the actual cash moving in and out. For lending, this is often the most direct view of repayment ability because debt is repaid with cash, not accounting profit. So the lender connects them like this: profitability from the income statement, liquidity and leverage from the balance sheet, and cash generation from the cash flow statement. Then they ask whether free cash flow and operating cash flow are enough to cover interest, principal, and any seasonal swings in working capital.

That helps. When I look at working capital, what exactly makes a lender nervous? Is it just if current liabilities are high?

High current liabilities alone are not the full story. A lender gets nervous when working capital is volatile, weakly controlled, or dependent on short-term funding. Key warning signs are: - receivables growing faster than sales - inventory building up without matching demand - payables stretching too far, which can signal supplier stress - negative operating cash flow despite reported profit - a current ratio that looks fine on paper but is supported by slow-moving assets For a banker, working capital matters because it affects cash timing. A profitable company can still miss repayments if cash is trapped in receivables or stock. So the lender asks whether the business can convert operating assets into cash quickly enough to meet interest and principal when due.

So if EBITDA is strong, why is that not enough? Corporate banking interviews always seem to focus on EBITDA and leverage.

EBITDA matters because it is a rough proxy for operating earnings before financing and non-cash items, so it is useful for comparing businesses and estimating debt capacity. But it is not enough because it ignores three things lenders care about: - capital expenditure, which can consume cash - working capital movements, which can absorb or release cash - interest and principal payments, which are the actual debt service burden A company can have strong EBITDA and still struggle if it must buy a lot of equipment, fund rising receivables, or refinance short-term debt. That is why corporate lenders move from EBITDA to cash flow. They want to see whether EBITDA turns into operating cash flow, and then into free cash flow after capex and working capital. That path is what supports repayment.

How would you frame debt service in a credit memo? I want a simple way to explain whether the borrower can actually pay.

A simple credit memo frame is: 1. Start with earnings capacity - Is the business stable and recurring? - Is EBITDA enough to support debt? 2. Adjust for cash conversion - Does operating cash flow closely follow earnings? - Are working capital needs seasonal or structurally high? 3. Test debt service - Can the borrower cover interest plus scheduled principal from cash flow? - Is there a buffer for stress, like slower collections or weaker sales? A useful way to say it is: the borrower can service debt if operating cash generation remains comfortably above total debt service after funding normal working capital and maintenance capex. In practice, lenders often look at debt service coverage and leverage together. Leverage tells you how much debt is on the balance sheet. Coverage tells you whether cash flow can carry it.

Can you tie this back to a real banking view? Like if I were assessing an Australian company with seasonal inventory, what would I check first?

For an Australian company with seasonal inventory, I would first check the cash conversion cycle. Start with: - inventory days: how long stock sits before sale - receivables days: how long customers take to pay - payables days: how long the firm takes to pay suppliers Then ask whether the peak seasonal build is funded by operating cash, committed lines, or short-term debt. A lender wants to know if the inventory build is temporary and self-liquidating, or if it becomes a permanent drag on cash. Next, compare peak working capital needs with available liquidity. If the business relies on drawing more debt just to fund stock, repayment risk rises unless sales quickly convert that stock back into cash. So the banking view is not just, can they make a profit. It is, can they fund the cycle, survive the peak, and still generate enough cash after the season to reduce debt.