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If your company is in urgent need of cash, one of your greatest options is to apply for a small business loan. There’s only one concern: securing a small business loan might be difficult. Lenders want to minimize the risk by confirming that you will be able to repay your capital, plus interest.
Examining your company’s finances is one of the most basic tasks in preparing for the business loan approval process. It’s vital to figure out the best fundraising strategy. You risk losing a chunk of your business or being stuck with repayment terms that will delay your expansion for years if you borrow money from the wrong place.
In this blog post, we’ll outline and explain the three reports you should run before applying for a small business loan to help you make understand your financial data. We’ll also go over a few crucial metrics that finance lenders look at, that you should be aware of.
1. Balance Sheet
A balance sheet is an important part of the accounting department and the company’s due diligence. A balance sheet is a summary statement that collects information about a company’s financial status at a specific time, usually at the end of the financial year. The balance sheet of a company shows what it owns, what it owes, and how much money it has committed.
The balance sheet is divided into three sections
Assets: It includes cash, inventories, invoices, properties, machinery, and intangible resources.
Liabilities: It includes accounts payable, tax liability, and other financial liabilities.
Equities: It includes all the stock you’ve issued, retained earnings, and paid-in capital.
The balance sheet is derived from the values you have entered into the accounting systems and their progression over time. After you have specified an initial balance for the business account, all activities in and out of it will modify that amount accordingly.
2. The Cash Flow Statements
Because revenue on an income statement may not show cash flowing to the organization, cash flow statements are critical documents to evaluate.
To indicate the inflow and outflow of money through your small business, the cash flow statement includes information from your Profit & Loss, Balance sheet, and other areas. It demonstrates how well you manage your money and the amount of additional money left over each month that may be used to pay off loans.
The following are the components of a general cash flow statement:
- The difference between your business’s net income from sales of goods and services and the cash you paid to vendors and other operational expenses, as well as the amount you paid in salary and payroll to your employees.
- The depreciation based on the reduced value of your company’s assets over time.
- Other gains and losses in your company.
- Amount of money earned by a company’s operations.
3. Income Statement or Profit & Loss Report
An income statement, often known as a profit and loss statement, is an accounting statement that summarises expenditures, revenues, and expenses for a specific period, usually a financial year or quarter. For business lenders, income statements are critical since they allow them to evaluate the long-term stability of your profits. Lenders will often examine your profit margins and sales volume using your income statement.
This report explains how your organization receives and spends money. For example, many company financiers demand that debtors have a particular level of annual revenue. Your profit and loss account contains revenue and sales statistics, allowing you to quickly determine whether you meet the fundamental eligibility conditions. Depending on your small business’s industry, operating activities, and other circumstances, revenue and expenses may be divided differently.
This statement basically determines whether profit figures can be maintained over the next several years, which has a significant impact on the prospects of repaying a business loan, given expected changes in the market condition and the overall economy.
All accounting paperwork must be certified by a CA and verified proof of company continuity (such as your ITR/Trade license/Establishment Certificate, among other things) must be submitted.
Conclusion
You can immediately find expansion opportunities that are ready to be utilized and spot concerns that are reducing resources if you have up-to-date and correct financial documents ready. Furthermore, knowing and managing these documents thoroughly prepares you for important discussions with possible lenders and investors.
Financial reports and relative computations won’t increase income immediately, but they’ll help you in the long run. Above all, by optimizing & running these reports, you’ll receive new, analytical insight into the firm, & it can significantly improve your possibilities of securing a business loan.
