If you've ever gone through the business loan application process, you know that preparing all that paperwork is one of the biggest pains of applying.
There are a lot of business loan requirements out there and each lender could require slightly different documentation.
But there are a few basic documents that you can absolutely expect to have on your long list of requirements.
Here's one of them: bank statements.
Business loans of all shapes and sizes will require bank statements. All lenders will want to see at least 3 months of bank statements--and they might want even more, depending on the type of business you run and the kind of loan you're applying for.
Wondering why lenders require bank statements and what exactly they're interested in with yours?
You've come to the right place. Let's walk through everything lenders are looking at on your small business's bank statements.
Start with the 3 Basics
Here's what lenders will be keeping an eye out for:
1. Your Business's Registered Name
Let's say you're the owner of Ben's Pizza Emporium. Your shop needs a new, state-of-the-art oven, so you apply for an equipment loan to help finance the purchase.
After receiving your small business loan application, your lender opens up your bank statements.
Here's the first thing they'll look at: your business's name.
And they're not just looking for "Ben's Pizza Emporium" at the top of the statement. They'll need to see "DBA Ben's Pizza Emporium."
It's a pretty obvious first step, but lenders need to see that your bank statements are in your business's registered name, or your "Doing Business As" (DBA) name. This proves they're your actual business's bank statements, not your personal bank statements.
2. Your Bank's Official Name
Lenders also need to see that your bank statements are from an official bank.
All valid bank statements will say the name of the bank that your business works with on each page of the statement.
Which leads us to the third basic requirement on a lender's checklist...
3. You've Included Everything
Lenders aren't just looking at the first page of your bank statements. They're considering every page of your business's bank statements.
So, they'll be checking to see that you've included the entire document.
They're also looking at the whole statement to make sure that you haven't tampered with it in any way. If you've deliberately excluded a page of the statement, covered up some not-so-great numbers, or fudged any of the information, they'll know.
Getting to the Important Stuff
Now that we've covered the most basic information lenders look at on your bank statements, let's get to the heart of the matter.
1. Your Average Balance
Simply put, your bank statements show what's coming in and going out of your business's bank account. And from that, lenders calculate what your average daily balance is.
A business's average daily balance is the most important thing a lender is looking at on bank statements. They're checking to see that, on average, you're keeping sufficient balances in your account.
Maybe your business brings in a killer annual revenue... But that means nothing if you can't manage the money that's coming in. Lenders want to be confident that you can maintain a healthy average bank balance so you'll be able to repay them--even if your business hits a few roadblocks along the way.
So what's considered "healthy"?
Well, that's up to the lender and depends on the kind of business loan you're applying for.
If you're applying for a more substantial loan, like a medium-term loan, you'll have to come up with 2 years of bank statements and prove that your business keeps a pretty high average balance--about a $2,000, typically.
And if your loan's a little smaller? You won't need to prove as high a daily balance.
At an absolute minimum, though, lenders want to make sure that you're keeping a positive daily balance--never letting your daily balance slip into the negatives.
2. Non-sufficient Funds (NSF)
Lenders aren't just looking at your average daily balance.
They're also checking to see that you're keeping any non-sufficient funds and overdraft days to an absolute minimum--or eliminating them entirely.
Their ultimate goal is to determine whether or not you can repay the loan. Frequent NSF days and overdrafts are a sign that your cash flow won't be able to handle regular loan repayments... And that they're better off investing somewhere else.
3. Daily Deposits
Lenders might also check to see how many deposits you have coming in and going out each day.
If there are frequent deposits to your account, lenders might take that as a sign that business is good and you have a healthy customer base.
On the other hand, if your account's last deposit was 6 months ago--and your cash flow suffers from the lack of activity--lenders could shy away from lending money to the business.
4. Recurring Payments
A lender might scan your bank statements for any recurring withdrawals from your account.
Why?
Well, they're looking for any other debt on your business's books. Recurring payments could suggest that your business is indebted to another lender.
Lenders rarely like to be in what's called "second position," where they're lending to a borrower that already has a loan from another lender. Doing so puts the lender in a risky spot--if your business fails, the second lender will only be repaid once the first lender gets their money back.
If your bank statements indicate that you have outstanding debt--don't worry. It's not a deal-breaker for every lender.
But they'll definitely want to know what the balance is on any of your business's outstanding loans.
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Let's take a step back from the specifics.
What you need to remember when it comes to your bank statements is this: lenders are using them to decide if investing in your business is a smart move.
If your average daily balance is all over the place, lenders might take that as a red flag.
On the other hand, if you can prove that your business is bringing in the dough and you're great at managing it, then you're in good shape.
This article was originally published on the Fundera Ledger on August 23, 2016