Since short term loans do not require any capital or security, lenders have very specific criteria in evaluating a loan application. The only way lenders will be paid back is through the revenue being generated by the business. The lenders will perform a financial analysis of the bank loan as the key factor in the decision making process. There are other items as well, but the business bank statements are the most important.
The lenders look at 4 important items in performing a financial analysis of the business bank statements.
Obviously lenders want to make sure the business is generating enough revenue. That is measured by looking at the amount of money that is deposited every month. Lenders like when deposits are consistent from month to month. Some businesses are seasonal so deposits may rise or fall depending on the time of year. Lenders understand this, but it is important to show revenue, even in slow periods.
Average Daily and End of Month Balances
Lenders look at how much money the business keeps in its account on a daily basis and at the end of the month. It is important to keep a good amount of money in the bank at all times. This shows the lender that the business owner can manage cash flow. If a business is generating large revenue but keeping little or no money in the bank, the chances of an approval go down significantly. Conversely, a business with smaller revenue but keeps a healthy amount of money in the bank on a daily basis and at the end of the month stands a better chance of obtaining funding.
Number of Deposits
Not only does the financial analysis look at the dollar amount deposits per month, but the number of deposits as well. Some lenders will not approve an application unless there at least 5 deposits a month, no matter how large the deposits. This is because the lenders want to see multiple sources of revenue. The fear is that if the business makes few deposits, it has a a small amount of customers. In that situation, if the business loses just one customer, its revenue will go down significantly. It is important to make as many deposits as possible every month, even if that means going to the bank to or three times a week.
Negative Days, Overdrafts and Bounced Checks
Lenders do not want to see the business bank account go negative, have overdrafts or worse, have bounced checks. A sporadic issue here and there will not be fatal, but when a business has these problems consistently, lenders will most likely decline the application for funding.
As can be seen, the ability to maintain a healthy business bank account is the key to getting working capital. It is just not revenue, which important, but the ability to manage cash flow as well.