When applying for business funding, lenders will ask you to provide a handful of documents to serve a variety of purposes—including proof of ownership, income and the financial health of your business. The document that seems to raise the most questions among business owners is their bank statements. Here’s why lenders ask to see your bank statements, and how they impact your ability to borrow funds.
Your bank statements tell a lot more about your business than just how much money is in your account. Lenders use your business bank statements to get a better understanding of how your company is managing its finances in order to evaluate your business’s ability to service funding—but it isn’t the only document that serves a key role in getting your company approved.
What Documents Do You Need When Applying for Funding?
- Usually 4 months of business bank statements, or a year if your business is seasonal (the number of required bank statements varies by lender and loan type)
- Your driver’s license
- Voided business check
- Proof of ownership
- Tax returns
Each of these documents helps lenders evaluate your business. Online applications are easy to complete if you gather the required documents beforehand, but the one document that seems to give business owners the most trouble is their business bank statements.
Don’t feel uneasy when a lender asks you for your past three or four months of bank statements. Most lenders require your most recent bank statements to assess the financial health of your business.
One of the things they’re looking for is your business’s registered name or DBA (Doing Business As) name. This confirms you are using a business account (and not a personal bank account) to operate your business.
How Do Lenders Use Business Bank Statements to Determine Risk?
Bank statements allow lenders to verify several factors relating to the health of your business.
For example, a low balance alerts funders that the applicant may not be able to handle additional payments. Low or negative daily balances are a sign that your business won’t be able to afford taking on another payment. Bank statements will also show recurring payments you’re currently making as well as any deposits made by another funding company.
To avoid confusion, be as transparent as possible with your lender during the application process so they aren’t surprised by anything they find.
Turning over your bank statements to a lender can be nerve-racking if you aren’t sure what they’re looking for. We’ve already touched upon some of the red flags that they’ll be looking for, but what are the positives they’re going to see that will get you approved?
Average Daily Balance
Your average daily balance says a lot about the way your business functions. Being able to keep and manage sufficient balances on your account is the most important thing lenders are looking for in your bank statements.
An impressive annual revenue can help your chances of getting approved, but not if your bank statements show you are struggling to keep a positive daily balance in your account.
If at the very least, you’ve been able to maintain a positive balance in your business bank account, lenders are more likely to approve your company for funding.
Lenders use your business’s bank statements to determine whether or not you’ll be able to repay their investment. Avoiding non-sufficient funds and overdrafts is a part of keeping your account balance positive. That’s not to say that one or two incidents are going to diminish your chances of finding a lender, but they are being accounted for.
Keeping your account balance positive and minimizing your amount of non-sufficient funds and overdrafts will help increase your chances of approval.
Another thing lenders are hoping to see when evaluating your business is frequent deposits to your account. If your business is receiving multiple deposits a day, your business is generally considered healthy.
However, if you haven’t received a deposit in weeks, lenders might shy away from financing your business. A lack of daily deposits can be the result of a handful of things, none of which are particularly promising for your business’s chances of being approved.
Lenders will also scan your bank statements for any recurring withdrawals. This scan checks to see if your business is already repaying a debt owed to another lender.
Some lenders will shy away from being what’s referred to as a “second position” lender because there is an increased risk of loss. Legally, if a business defaults, the second lender must wait for the original lender to be repaid before they begin seeing compensation for their loss.
If your business is repaying pre-existing debt, it doesn’t mean you have no chance at being approved – but your lender will want to know of any remaining balances your company may have.
Business Bank Statement Loans: The Bigger Picture
At the end of the day, all lenders want to see is that your business is healthy and consistent.
While the definition of a “healthy business” varies from lender to lender, if your business is making enough to operate comfortably while paying it’s expenses, employees and debt, then chances are, you’ll be considered a good candidate by lenders.
Likewise, if your business has shown the ability to turn a profit for at least two years, you’ve demonstrated your consistency. This is incredibly important for lenders to see because they want to make sure that your business is sustainable before they extend capital to your company.
Don’t be afraid to share your business’s bank statements with your lenders, even if you’re afraid they aren’t impressive. If you’re honest with your lender from the beginning so they aren’t surprised by what they find, you have a much better chance of working with them.
If you’d like to learn more about how lenders use bank statements to evaluate your business, Fast Capital 360 can help. Fast Capital 360 is a great resource for small businesses having trouble finding the funding options that are right for their unique situation. With our simple and fast online application, we can pair you with financing options through lenders whose requirements you can meet. And our experienced Business Advisors can help you navigate your options, matching your needs with a funder and program that makes sense for you—whether it’s a second-position loan or an SBA express loan.