Business Bank Statement Loans: Why Are Statements Required?
Also, unlike your financial reports, your bank statements come from a trusted, third-party authority. With your bank statements, lenders have the resources they need to verify the veracity of your financial statements. In a nutshell, this is why bank statements are absolutely central to your loan application.
Given their importance in your financing journey, we wrote this post to explore why lenders use bank statements. In the following sections, we’ll review bank statement red flags and explain how lenders use your bank statements to verify certain financial reports.
To wrap up, we’ll touch on bank statement business loans, a type of financing that’s solely based on your bank statements.
Bank Statement Red Flags
The first three most basic things a lender checks on your bank statements are:
- Your account balance.
- The frequency and amount of withdrawals.
- The frequency and amount of deposits.
Lenders want to see high account balances and a healthy ratio of withdrawals vs. deposits. If you have a large number of withdrawals but few deposits, that’s an indication you’re spending more than you’re making. To a lender, a borrower that is spending more than they’re making is not an attractive candidate.
While it won’t always stop you from getting approved for a small business loan, lenders will need an explanation for these red flags.
Re-Constructing Your Financial Statements
When a lender approves your loan, they’re investing in your business. Like any investor, they must closely evaluate your business. This helps them determine how much to invest in your business, at what cost, and for how long.
There are three main documents that any professional analyst wants to see when they evaluate a business:
- Income statement: reports company revenue and expenses over a specific period.
- Balance sheet: reports company liabilities, assets, and equity over a specific period.
- Cash flow statement: reports a summary of the amount of cash flowing in and out of a company.
Taken together, these three statements provide an overview of your business’s capital structure and financial performance. Specifically, lenders analyze these statements to determine several important financial ratios, which are described below:
Debt-to-Cash Flow Ratio
This is a measure of your business’s cash flow compared to the amount of your debt. It’s calculated by dividing your debt by your cash flow. Essentially, this ratio measures how long it will take for you to pay off your debt.
As Wells Fargo explains, lenders use your debt-to-income ratio (DTI) to evaluate the risk of you taking on another payment. The DTI ratio helps accomplish this by calculating the portion of your gross monthly income to your monthly payments. For lenders, this ratio is important because it shows how much of your monthly income goes to payments. With that information, lenders can determine how much more in payments you can afford.
The quick ratio determines how much liquid assets your company has to pay off its short-term debt and obligations. It’s calculated by subtracting your inventory from your current assets and dividing the result by your current liabilities. Put another way, if all of your current year debt obligations came due at the same time, this ratio shows lenders your ability to pay them off.
In addition to proving the veracity of your financial reports, bank statements also help lenders calculate these ratios. In fact, as you’ll learn next, bank statements are so important that some no or low-documentation loans only require bank statements.
Bank Statement Business Loans
As mentioned in the introduction, business bank statement loans are solely based on the numbers on your bank statement. However, these loans are only made by certain types of lenders, typically online alternative lenders.
While bank statement loan requirements may vary a bit, you’ll generally need the following for a bank statement business loan:
- Three to six months of business bank statements
- Records of assets or investments
- Proof of business ownership
- Business license
- Tax returns
- Voided business check
- Driver’s license
- A minimum credit score of 600
Bank statement lenders will want to verify your bank statements with proof of deposit. Also, they’ll likely want details about your account such as account number, balance, and the names on the account.
Compared to traditional loans, bank statement business loans have higher interest rates, lower loan amounts, and shorter loan terms. However, if your business’s financials aren’t well-established, bank statement loans may be your best bet. Their approval criteria are far more lenient than traditional loans. Plus, the lower loan amounts are often not an issue for newer businesses.
Conclusion: Bank Statement Loan Alternatives
If you’re looking for a bank statement loan program, there are a few similar financing options you should consider. These include a merchant cash advance (MCA), accounts receivable financing, and a line of credit from an online lender.
Each option works differently than a bank statement loan, but all of them have comparable credit and documentation requirements. Therefore, if you qualify for a bank statement loan, you may also qualify for these bank statement loan alternatives.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.