Jul 31, 2020

4 Things Lenders Like to See in Your Books

There’s no shortage of plans in this world. At this very moment, it’s likely that several of your neighbors are daydreaming about how they could one day start a business. The desire to plan and scheme is ingrained in most humans—what’s less common, however, is when individuals have the talent, resources, and tenacity to carry out those big ideas.

This isn’t to say that a plan isn’t a crucial part of your business’s success. You should absolutely create a formal document that lays out where you want to go, how long it’ll take to get there, and how you’ll achieve these goals.

When you approach lenders for financing, they’ll read your business plan with great interest—but that’s only the beginning of the review process. Their objective is to determine whether you have the ability and willingness to pay back every cent they provide to your business. Making this assessment requires them to open your books and look at a wide range of financial factors.

While lenders have their own requirements and each loan situation is different, you can typically plan on lenders looking at the following aspects of your finances:

1. Your business credit score: There are plenty of nuances when it comes to the various aspects of your financial health. But sometimes lenders and other outside parties simply want to view a snapshot. Your credit score serves this purpose by distilling everything down to a basic number.

“Just as the bank reviews your personal credit score and credit history when you apply for a car loan or mortgage, creditors review your business credit score and history when your business applies for a credit product,” explains a business credit analysis from US News. “Your business score tells them how much of a credit risk your business poses based on past financial behavior.”

Your credit report will reveal potential red flags to lenders, like late payments, bankruptcies, current debts, and foreclosures. No single blemish on your report will sink your chances for financing—but if they appear consistently, your score will reflect these issues, and lenders will regard you with understandable caution.

2. Your income statement: In order for you to make loan payments reliably, you’ll need to have a steady flow of money coming in your doors. Lenders use your income statement to gauge the strength and consistency of your sales. Much like a credit score, it provides an easily digestible cluster of information for those reviewing your business.

“The income statement is a simple and straightforward report on a business’s cash-generating ability,” says Entrepreneur. “It’s an accounting scorecard on the financial performance of your business that reflects the quantity of sales, expenses incurred, and net profit. It draws information from various financial categories, including revenue, expenses, capital (in the form of depreciation) and cost of goods.”

A large income on your statement is only impressive if your expenses are substantially lower. If your business offers products or services with a healthy profit margin, lenders will likely view this as a sustainable model that will bring you future success and allow you to be a dependable borrower.

3. Your debt-to-income ratio: A crucial aspect of your expenses is how much you’re paying each month for things like mortgages, loans, or insurance. Your debt-to-income ratio reveals the balance between what you’re bringing in and paying out on a monthly basis.

“Lenders may consider your debt-to-income ratio (DTI) in tandem with credit reports and credit scores when weighing credit applications,” says Experian. “To calculate your DTI, divide your total recurring monthly debt (such as credit card payments, mortgage, and auto loan) by your gross monthly income (the total amount you make each month before taxes, withholdings, and expenses). For example, if your total monthly debt is $3,000, and your gross monthly income is $6,000, you would divide 3,000 by 6,000 to get .5 or 50%.”

The lower your ratio, the stronger your chances of getting approved for the loan of your choice. You might be able to secure a loan with a debt-to-income-ratio in the low 40s, but most lenders will want your ratio to be at 36% or lower.

4. Your balance sheet: Many of the financial factors a lender considers are ultimately to assess whether or not your business has a healthy balance. Is it bringing in enough money to offset its expenses? This question is never more literal than with your business balance sheet.

“A balance sheet is a statement of the financial position of a business that lists the assets, liabilities, and owners’ equity at a particular point in time,” explains business guru Susan Ward. “In other words, the balance sheet illustrates a business’s net worth.”

Your balance sheet will showcase line items like equipment, office buildings, real estate, and vehicles. To provide a full picture, the balance sheet also lists out liabilities like debt to suppliers, loan payments, and tax obligations.

The diversity of financial factors that play a role in loan-approval decisions underscores the importance of accurate bookkeeping. If you neglect certain tasks, you run the risk of undoing all the other good you’re doing. Incomplete financial records can easily sink your efforts to get financing.

The good news is that approaching your bookkeeping with precision and care does more than just improve your chances for loan approvals—it will also improve nearly every other aspect of your business. You’ll be able to identify your most profitable products or services, recurring expenses that can be decreased, and other aspects of your finances that can be refined. And each step you take to improve your finances will bring your business a little closer to reaching the big ideas that have been driving your plan all along.

About the author

Grant Olsen
Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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