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What Banks Look for in Your Financial Statements

Small business loans are on the rise. Between 1996 and 2003, banks with more than $10 billion in assets upped their share of business loans under $100,000 to 40% from 18%, reports the Office of Advocacy of the U.S. Small Business Administration. What should business owners be representing in their financial statements to meet the needs of lenders and quicker turn around on a loan request?

The financial statements of a small business are the foundation for any financing, venture funding or business transactions. No matter how small the business may be, accurate and reliable balance sheets and income statements go a long way toward instilling confidence with your bank's loan officer.

'Understanding the components of an income statement and balance sheet can really streamline the loan application process,' says David Prather, Fiducial's accounting and financial reporting product manager. 'That's why it's so important to have a firm handle on business finances before you seek financing or funding to seek expert advice when preparing monthly, quarterly and annual statements. One incorrect filing or lack of supporting documentation can put your business under scrutiny with both your bank and the IRS.'

Primary financial statements are represented in the balance sheet and income statement and will be requested by the lending institution at your initial loan meeting. These are important since they demonstrate a roadmap for success for the business. Banks will use financial statements to spot trends and anomalies and then follow up with further investigation. If the company's accounts receivables (A/R) have trended significantly downward over the last few years it could mean that you're collecting the accounts more aggressively (a positive) or it could mean that you're writing off the losses sooner (a negative) rather than pursuing collection. Either way, it will provide insight to the bank on how you operate your business and what type of risk you might be.

Here's a breakdown of the most important components of both the income statement and balance sheet. See how your business' financial statements measure up:

Income statement

Profit and loss statement-The income statement shows all income receipts and expense payments over a period of time. It also shows the profitability of the business. The income statement does not reveal hidden problems like insufficient cash flow concerns and for that reason, steps can be taken to adjust the statement and create a slightly healthier outlook. Be sure to provide ample documentation for what you report. When in doubt seek expert advice.

The statement also includes sales, cost of goods sold, gross profit, operating expenses, depreciation, operating profit, other income and expenses, net profit before taxes, income taxes and net profit after taxes.

Typically, banks are looking for three years' worth of income statement data to make comparisons and business trending reports.

Balance sheet

The balance sheet shows a snapshot of the company's financial statements at a single moment in time. It shows the company's financial position (assets = liabilities + equity) and outlines liabilities and net worth. The balance sheet has to balance-if it does not, it can cause much angst to a small business owner who is already struggling with monthly accounting.

Analyzing how the balance sheet changes over time reveals important information about the company's business trends. It can depict how you manage the business' inventory, reveal your ability to satisfy creditors and stockholders, and ultimately demonstrate the net worth of the business.

Other items in the balance sheet include liabilities and net worth as well as assets. Liabilities represent company's sources of funds. Those who provide cash or its equivalent to the company and the company's obligations to its creditors (what you owe) are liabilities. Net worth represents the owner's investment in the company. Assets are anything of value that is owned by the business. There are many different kinds of assets including cash, accounts receivable, inventory, machinery, vehicles, buildings and property. The value of those assets reflect a dollar amount in your asset column but not cash in your checking account.

After you've polished your financial statements, it's time to gather your courage and walk into the bank. When sitting with the bank's loan officer, small business owners should know which principles will guarantee the loan and should include a personal financial statement and at least one year of tax returns with the loan application. Do your own due diligence with the bank and the loan officer. There should be an open and frank dialogue to determine if the bank is a good fit for you and your business. Remember that the loan officer is your advocate to the lending committee. If you don't feel that the loan officer is fully engaged and will advocate to the loan committee on your behalf, then move on to another bank.

Unless the bank needs to see them more frequently, quarterly should be sufficient.

'Remember that the bank will also consider what software applications were used to record the transactions and compile the financial statements,' says Prather. 'The easier it is to alter the financial statements, the less reliable they become. Having a system of checks and balances and a solid paper trail will provide additional assurance that what is represented is accurate and reliable.'

To learn more about financial statements and how they can impact your business' future, contact a Fiducial representative today at 888-FIDUCIAL or visit the web site at www.fiducial.com.

Fiducial Investment Advisors, Inc. is a member of the NASD and SIPC. Some investments may not be suitable for all investors. Please consult with one of our professionals. Fiducial Investment Advisors, Inc. is licensed to transact business in all states and the District of Columbia as a broker/dealer.

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This page last modified: 14 Mar 2008