When running your own business, meeting your financial requirements can be quite troublesome. From office rent to purchase orders and utility bills, the expenses just never end. Alongside this, the need to maintain good working capital and cash flow is extremely important to managing the finances of your business. If you are a budding entrepreneur, you can always apply for any of the government schemes for startups.
Another great way to tackle such monetary issues is to apply for a business loan. However, to do so you need to research well about the different interest rates and eligibility requirements. The financial statements of your business, which you would be asked to submit, play a major role in helping you borrow the required amount. Let us understand how in further detail.
Financial Documents Required for Business Loans
First, let us look at all the financial documents required for a business loan.
- Balance Sheet
- Bank Statements
- Profit & Loss Sheet
- Latest ITR
Your ITR serves as proof of your income and whether you pay taxes regularly. Meanwhile, your bank statements help the lenders understand your current financial situation. The profit and loss statement enables the lending firm to understand your business better and ascertain the financial status of your company.
What is a Balance Sheet?
The balance sheet is a document, which usually garners a lender’s maximum attention. This sheet plays a significant role when applying for a government scheme for startups as well. Why is that? Let’s find out.
A balance sheet is a financial statement that provides an overview of the firm’s financial records and helps evaluate future operations. It consists of a record of the major components of a business like assets and liabilities. Let’s understand these in further detail.
In simple terms, assets are everything a firm owns. It includes cash, accounts receivable, property, inventory, investments, and other valuable possessions. These are usually categorised as current assets which are short-term assets and noncurrent assets which will be held for a long time. This distinction is made on the basis of their liquidity.
Liabilities are all the debts and expenses payable by a business. These encompass loans, credit card balances, accounts payable, and accrued expenses, amongst other financial obligations. Similar to assets, liabilities are also deemed as current and non-current, based on the timeline of their repayment.
How Does a Balance Sheet Impact Your Business Loan?
Now that we have understood the important aspects of a business covered under a balance sheet, let’s look at its impact on your business loan.
Lenders tend to look at the balance sheet to ascertain the creditworthiness of a business. They tend to analyse financial ratios like the profitability, and solvency ratios, to determine the risk levels associated with providing a loan to the firm. A healthy balance sheet with manageable debts and strong liquidity indicates better repayment capability, lowering the risk of default.
2. Financial Stability
A balance sheet provides crucial insight into the firm’s financial stability. It allows the lending institution to gauge a company’s ability to generate regular earnings, sustain a healthy cash flow, and manage expenses. Financial stability adds a feather to a firm’s cap of credibility and improves its chances of getting a loan.
3. Business Priorities
A balance sheet outlines the priorities of a business. It allows a firm to highlight the assets that generate the maximum revenue and the liabilities that need to be paid off immediately. The Debt-to-Income (DTI) ratio is a good indicator of the firm’s ability to manage its finances and to understand how it balances its repayments and business growth led by asset acquisitions.
Profit & Loss Statement
One of the most important documents alongside the balance sheet that is evaluated by lenders is the Profit & Loss Statement. It is an income statement which summarises the firm’s income and expenses, indicating whether the business is in profit or loss. But why is this important to a lending institution?
1. Assessing Profitability
This sheet allows lenders to gauge a firm’s capability to generate income and manage finances to achieve overall profitability. Revenue trends, profit margins, and cost structures are all analysed to make sure that the applicant company can generate enough income to manage its operations and repay the loan.
2. Evaluating Performance
As company earnings carry a higher proportion of risk as compared to salaried employees, it is important for lenders to analyse the revenue growth of the firm. This along with the net profit trends and expense management are taken into consideration when determining a firm’s sustainability and predicting its future profitability and performance. Consistent net profits indicate the stability and viability of a business.
Be it applying for a government scheme for startups or getting a business loan, getting the required finances has become quite easy and convenient. However, when considering the latter, your financial documents play a huge role in determining your eligibility. Keeping in mind the points discussed above, make sure that the financial documents required for a business loan are audited and consist of all the vital data of your firm. This will help you have a better chance of getting the required loan amount and scale your business to new heights!