What Financial Information Do Business Lenders Review?

When a finance provider reviews an application, the numbers do much of the talking. Each set of figures answers a different question about the business, and providers read them together rather than in isolation. A strong profit figure carries less weight if cash is tight, and a healthy bank balance means less if large bills are about to fall due.

This guide explains what each part of your financial information typically tells a provider, and what is likely to prompt further questions.

The profit and loss account

The profit and loss account shows whether the business makes money from its trading. Providers typically look at:

• Turnover trend. Whether sales are stable, growing or falling across the periods shown.
• Gross margin. Whether the business earns a healthy return on what it sells, and whether that margin is holding up.
• Overheads. Whether running costs are under control relative to income.
• Net profit. Whether profit is consistent, and whether one-off items are distorting the picture.

Providers often look at earnings before interest, tax, depreciation and amortisation as a broad indicator of the cash the business generates from trading. They may also ask how directors are paid, because a mix of salary and dividends affects how profit appears in the accounts. Be ready to explain any unusual items, such as a one-off contract or an exceptional cost.

The balance sheet

The balance sheet shows what the business owns and owes at a point in time. It tells a provider how resilient the business is.

• Net assets. A positive and growing position suggests profits have been kept in the business. Net liabilities are likely to prompt questions.
• Liquidity. Whether cash, stock and money owed by customers comfortably cover the liabilities due in the short term.
• Existing debt. How much the business already owes to other providers, and when it falls due.
• Director's loan account. Amounts owed by or to directors, which providers usually want explained.

Cash flow and bank statement conduct

A profitable business can still run short of cash. Providers want to see that profit turns into cash and that cash is managed well. Where the pressure comes from timing rather than profitability, working capital finance or invoice finance may be relevant.

Bank statements show how the business actually operates day to day. Providers typically check:

• whether money coming in is consistent with the turnover you have stated
• the pattern of the balance through the month, and how often any overdraft limit is reached or exceeded
• returned or unpaid direct debits and payments
• regular repayments to other providers, which should match the borrowing you have disclosed
• payments to HMRC, and whether they are made regularly

Accounts with steady, predictable patterns support an application. Frequent unarranged overdrafts or returned payments usually need explaining.

Management accounts, debtors and creditors

Filed accounts can be some way out of date by the time you apply. Management accounts show current trading, and providers often give them significant weight. Accurate management accounts prepared regularly also suggest the business has a good grip on its finances.

Providers may also review aged debtor and creditor reports:

• Debtors. How quickly customers pay, how much is overdue, and whether a large share is owed by one or two customers. The debtor book is central to invoice finance, because it supports the facility.
• Creditors. Whether suppliers are paid on time. A growing backlog of overdue creditors can point to cash pressure, even when profits look healthy.

Forecasts

Where the funding is for growth or a new contract, a forecast shows how the business expects the funding to perform. Providers look at:

• whether assumptions are realistic and consistent with past performance
• the timing of income and costs, not just annual totals
• whether repayments remain affordable if sales arrive later or come in lower than planned

A forecast that ties back to your historic figures and explains its main assumptions is more persuasive than an optimistic projection. This applies whether you are seeking a business loan or another type of finance.

For how these figures fit into a provider's wider assessment, see what business lenders look for. To gather the paperwork itself, use our checklist of documents needed for a business loan.

Key points

• Providers read the profit and loss account, balance sheet and cash flow together.
• Bank statements show how the business runs day to day and should match what you disclose.
• Recent management accounts and debtor and creditor reports show current trading.
• Forecasts are most persuasive when they tie back to historic performance.

This guide is general information, not financial, legal or tax advice. Finance is subject to status, eligibility and approval by the relevant finance provider. Emirex Finance works with UK limited companies only and is not authorised or regulated by the FCA.