January 25, 2022
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.
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.
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.Debt-to-Income Ratio
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.Quick Ratio
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