Financial Statements: How They Affect Your Business Loan

When applying for a business loan or some other line of credit, a written loan proposal with financial related documents will be required for consideration, and a financial statement will always be requested. This can come in several forms: income statements, balance sheets, retained earnings statements, and cash flow statements.

A concise report is crucial to the application for a business loan. If the application is for a new business, personal financial statements will be required with the loan proposal.  Existing businesses will use their own statements.

How Business Loan Applications Use Financial Statements

The Small Business Administration requires that all principal owners and guarantors provide financial statements, and they must not be older than 90 days. Often previous year's federal income tax returns are required as well.

An existing business will need to provide at least three years worth of financial statements, along with a current dated statement. Balance sheets, profit and loss statements, net worth, in addition to aging accounts payable and receivable, and any term debt. Sometimes financial statements will also share collateral that can be used to repay a loan.

Being well prepared with a keen knowledge of the information within the financial statements will be key to providing a successful loan application. The information within those statements will show if a person is a good or bad credit risk. The lender is looking for a consistent cash flow in order for monthly payments to be remade.

The financial statements should be grouped to show the primary categories used in the particular industry. Meaningless filler should be avoided as the loan committees will see right through it.  Sometimes too much information is overkill - details of every transaction or meaningless financial schedules can actually hurt the odd of a business loan.

Ways Financial Statements Affect Business Loans

Financial statements have an impact on business loans in several ways:

  • Provides insight into a business's ability to repay and whether or not they are a risk.
  • The financial statement shows the assessed financial strength of a business, which will determined the loan rate.
  • The statements will determine how much money the lender is willing to provide, based on the ability to pay.

Lenders access all this valuable criteria, which is why it is important to be concise. In addition to the Small Business Administration, local banks, and other sources of business resource are willing to give loans based on specific needs. Providing well documented financial statements will increase the chance that a lender will approve the request.