How Does Your Bank Balance Affect Your Business Loan Approval?

Updated on: 03 Jan 2024 // 4 min read // Business Loans
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Every business needs to sustain, grow and enhance its revenue with passing time, all of which makes it imperative for it to enjoy a consistent inflow of funds. While these funds help meet the day-to-day requirements of the business, there are times when investments pertaining to expansion of business or purchase of new assets need to be made. Funds for such investments can usually be borrowed from a lending institution, in the form of a Business Loan. This is an unsecured loan which can be taken by a self-employed professional or a business owner. The average amount of this loan varies from a minimum of 3 Lakhs to a maximum of 1 Crore, while the tenure of repayment may range from 24 months to 60 months, depending on the terms and conditions of the loan.

Given the hefty amount of sum involved in a Business Loan, it is evident that the lenders determine the ability of the enterprise to repay the loan. The factors on which this decision is based include:

  • The age of the business
  • The current profitability
  • The credit rating of the business
  • The credit rating of the business owner

While these are the most commonly known factors, there is yet another thing that the lenders look for – your bank balance and liquidity. Though it may not be explicitly indicated, almost every lender has an eye on your current financial standing. After all, they do not want to approve a loan where there is any risk involved. Here are some aspects concerning your existing status that might have a direct impact on your business:

Annual Revenue and Profit

For a lender to perceive your business as a low-risk venture, it is essential that your debt-to-income ratio is as low as possible, preferably not more than 43%. Hence, it will prove to be in your interest if your fixed expenses are within a reasonable limit. Not only will this help you get a quicker approval, but will also ensure a low interest rate on your loan.

To take a close look at the financial status of your business, lenders usually request a copy of your profit and loss statements for the past two years that has been updated within the last 60 days. The fundamental idea behind this exercise is that the lenders need to be sure of consistent profitability of your business. Hence, it is crucial that the cash flow of your business is steady when you apply for a loan, thereby offering strong evidence of your ability to repay the amount.

Bank Statements

Lenders are often reasonably interested in carefully analysing your bank statements, to understand your ability to repay the loan. Besides, these statements help the lender gauge your efficiency in managing the revenue. In this case, it is not just the cash inflow that interests the lender, but your management of the same. Hence, the larger your bank balance, the more a lender can rely on your business to repay the credit, even in adverse situations.

You should be prepared to produce the bank statements for the past 6 months when you apply for a Business Loan. If you do not already have a separate account for your business, you must open one before filing your loan application. Not only will it offer functional ease concerning bookkeeping and tax filing but will also help in the smooth processing of your loan. And of course, having distinct accounts for personal and business purposes will help you enjoy greater convenience.

Balance Sheet

The balance sheet of your business will necessarily help the lender analyse the assets held by your company as against its liabilities. As must be evident, the total value of your assets should ideally exceed the amount of your debts. This will help the lender rest assured of the fact, that even in case of some unexpected losses, the business will conveniently survive, and you will be able to pay the EMIs (Equated Monthly EMIs) as per the schedule. Hence, make sure to have the balance sheet for the last two years ready when you apply for a Business Loan.

Liquid Assets

In most cases, your cash inflow should suffice when it comes to helping the lender analyse your ability to repay the loan. However, depending on the loan amount and the current standing of your business, your lender may want to conduct a quick check to see whether you have some liquid assets which can be swiftly converted to cash if your business takes a wrong turn. The following are usually considered as liquid assets:

  • Cash Savings
  • Money Market Account
  • Stocks
  • Government Bonds

Now that you know how exactly your bank balance can affect your business loan approval, we are sure you will be better prepared with a strong balance sheet before you apply for a business loan! Remember, the key is to exhibit a steady cash inflow, reasonably efficient management of cash as well as a commendable financial discipline!