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• What is the net profit for a trader who deals in physical goods?

  Turnover minus costs of goods sold and overheads
• What are overheads in the context of a trader's net profit?

  Expenditure incurred in the course of business, such as administration and travel
• How is gross profit calculated?

  By deducting costs of goods sold from turnover
• Why is gross profit important for a business?

  It helps understand if the applicant can afford to borrow
• What reduces the net profit further after calculating it?

  Capital allowances
• What do capital allowances refer to?

  The cost of capital used in the business, such as vehicles and computers
• How is depreciation related to capital allowances?

  It is shown in limited company accounts as capital allowances
• Why do most lenders use the net profit figure for credit assessment?

  It reflects the excess of income over expenditure in a trading period
• How is the annual profit share of each partner in a partnership determined?

  In a partnership agreement or informally agreed upon
• What is a common characteristic of partnerships in the UK?

  They are often family businesses, such as married couples
• Why might lenders adjust the net profit figure?

  To account for non-cash items like depreciation and capital allowances
• What is the figure derived after adjusting net profit for non-cash items called?

  Net operating cash flow
• Why is net operating cash flow considered a truer picture of actual cash income?

  It accounts for non-cash items, unlike net profit
• What is the most important consideration for lenders regarding income sustainability?

  The medium- to long-term sustainability of income
• Why do sole traders and partnerships present a greater risk to lenders?

  Because their income is more volatile month-to-month
• What issues can affect cash flows for small businesses?

  Seasonality of income and timely collection of receivables
• What change in lender attitudes occurred after the 2008 financial crisis?

  More conservative attitudes towards permitting business overdrafts
• What risk do small businesses face when relying on one or two major customers?

  They may face difficulties if a key customer is lost
• Why is the capital account figure for personal drawings not appropriate for lending purposes?

  It only shows what the individual has taken out, not what they have earned
• What does it indicate if drawings exceed profits over a sustained period?

  The trader is taking more from the business than it earns
• What are the different forms companies can take?

  • Private limited companies
  • Public limited companies
  • Companies limited by guarantee (mainly not-for-profit)
  • Unlimited companies (rarely encountered)