5 Important Documents For Business Loans
Managing a business is not easy. You need to juggle cash between suppliers, customers, employees, overhead costs and much more. Getting on top of your finances is your ‘the’ priority.
Business loans can be your saviour at such times. There are various lenders who can offer you a business loan. But, you need to fulfil certain basic requirements. After all, lenders need to ensure they get the loan money back. Hence, lenders have a list of requirements before lending you the amount.
Let’s look at five important statements that lenders consider before giving a business loan:
Essentially, a balance sheet is a snapshot of what the company owns and what it owes. One side of the balance sheet comprises assets, such as buildings, land, equipment, vehicles and cash. All the liabilities, such as goods purchased on credit and outstanding loans, are on the other side. By inspecting the balance sheet, the lender can have a sketch of your current financial position.
Profit and Loss Statement
A Profit and Loss (P&L) statement is an important financial report comprising the company’s revenues and expenses. This statement is usually generated for a fiscal quarter or the year. The P&L statement displays the net income of the business during the period.
If your P&L statement reflects consistent profits, your loan application process can be expedited. Good profits reassure lenders of your repayment capabilities.
Lenders pay maximum attention on this document. Debt service is the business income’s portion repaid as the interest and principal on a debt. Thus, before applying for a business loan, you should calculate the business’ debt service coverage ratio. This ratio is calculated as the total cash available for servicing debt to the outstanding interest and principal.
For example, the net operating income is Rs.1 lakh and the total debt service is Rs.75,000.
Then, the debt service coverage ratio is calculated
Debt service coverage ratio = 1,00,000/75,000 = 1.33
This means that your net operating income covers your debt service 1.33 times.
A high debt service ratio indicates that the company has the income to meet its repayment obligations. Thus, in case the debt ratio is less than 1, the lender may decline the loan offer.
Accounts receivable is the total amount owed to your company by various debtors. For example, your company manufactures plastic bottles. Then, your debtors are the wholesalers who buy the bottles from you.
The debtors are generally offered 30–45 days to pay for the purchased goods. This is to avoid the inconvenience of making payments for every small transaction. The accounts receivables indicate that the company has goodwill in the market. This can have a positive impact on your loan offer.
While your balance sheet is a detailed statement, the tax returns are a confirmation to your account summary. Filing returns is a mandate as per the Income Tax Act. Thus, timely filing your income tax returns reinsures the lenders.
Tax evasion is a serious crime and lenders would hesitate to offer loans to tax evaders.
To sum it up
A lender might have numerous requirements while offering a business loan. After all, they are investing their money by lending it to you. Hence, they need to be sure it is being put to good use and that you will be able to repay it on time. Fulfilling the requirements can help you gain their trust. It can also ensure you get the right loan amount needed to grow your business.