Why business lenders need your bank statements
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If you’re applying for a business loan – no matter which type and which lender – you’ll need to provide supporting paperwork. That can seem like a daunting task, but it doesn’t have to be – while big banks will want to see full financial statements, business plans and comprehensive financial projections, most fintech lenders only want to see 3 – 12 months’ of bank statements.
Your business bank statements are critical if you want to get a business loan. If you’re wondering why, this article is for you.
What lenders are looking for in your bank statements
Lenders will actually be looking at a lot of different information from your statements, to help them with their decision to give you a loan.
Here’s the basics:
- They need to know that you have an account with a legitimate Australian bank. The name of the bank should appear on every page of the statement.
- They need to know that the statements belong to your business account and not a personal account. Your business / trading name should appear at the top of the statement.
- They want to make sure that you have submitted the entire statement, and not left any pages out or tampered with the statements to conceal information from them. It is crucial that you do not alter your statements in any way.
Although this only applies to lenders that accept manually uploaded statements such as PDF files – most don’t, and for good reason. The best way to submit statements (for both you and the lender) is via direct data retrieval from your bank. More about this later.
Second, they will look for evidence of your financial stability:
- The most important thing they’ll be looking at is your average monthly sales. This means they’ll be checking your deposits to determine your revenue. This will involve looking at any unexplained deposits (such as cash or transfers) too. Deposits that are not business income will be excluded from your average monthly sales.
- Then they will look at your daily end balance, as a monthly average. This shows the lender how much surplus you have (on average) in your account on a given day. The following example graph shows the day end balance, with some of them being negative.
One and two above and used to see if you have enough funds to service a loan – and whether you are managing your cash flow and maintaining a steady credit balance.
What is considered a ‘healthy’ bank balance will vary between lenders, and will also depend on the amount of the loan you’re applying for.
The more you want to borrow, the higher the average and consistent balance they’ll want to see, because they need to know you have enough funds to cover both your existing outgoings and the extra cost of your loan repayments.
- The lender will look for any negative days, dishonoured payments or unauthorised overdraft fees. A few mishaps may not deter them from providing you a loan, but if you have a large number of these in your payment history it will show them you aren’t able to handle money very well. That means you may have problems paying them back, making lending to you too much of a risk.
- The next thing they’ll look at is the volume and frequency of your deposits. Are they all from one or two customers, or many? Regular deposits from multiple customers show that your income is consistent. If yours is a business with seasonal / fluctuating sales, they’ll need to see enough statements to show that you have a reliable income pattern. If you haven’t received deposits into your account for a few months, or if your deposit pattern has changed and suggests declining income, they may assume your business isn’t doing very well and decide to say no.
- Finally, they’ll look to see if you make recurring payments. This will include whether you make payments to other lenders. Having an existing loan won’t necessarily turn them away, but it could be a deal breaker for some lenders. If you do have existing debts, your potential new lender will need to know how much you are paying each month and how much is still outstanding, so they can assess your capacity to service their loan too.
Submitting your bank statements
Most lenders require that they retrieve your bank statement data electronically, direct from your bank (via a trusted 3rd party like BankStatements.com.au).
Here’s an example of Lend using BankStatements.com.au.
The way this works is that you’ll log in to your online banking via a secure 3rd party platform to authorise them to retrieve your bank statement data and pass it on to the lender.
If this is what your lender requests, do not worry.
- They’ll only be able to retrieve a read-only copy of your bank statement data, using a third-party automated retrieval system.
- The entire process is automated so no one from the lender will be accessing your bank account.
- The automated retrieval system will not be able to make any changes to your account or make any transactions.
How to protect your financial data while applying for a loan
Of course, you may still have concerns about security. While anyone can become a victim of identity fraud, there are safeguards that lenders have put into place to make this exchange of information safe, as well as things that you can do protect yourself during the application process:
- Don’t provide your online banking credentials over the phone or email. A legitimate lender will never ask you for your bank credentials in this manner, they would only ask you to complete the process on their secure website.
- Check that the lender you are applying with has a secure website. This goes for any website you are using where you are entering personal, business or financial information.Look for the padlock in the browser. It means the website is using an encrypted connection.
Here’s an example of the padlock you would expect to see in chrome.
And if you clicked on the padlock you should see something like this.
- If you are worried about your information, you can always ask the lender what security they have in place to protect it – for example, do they use encryption as well as if they share the information with any third parties, and how and what information they will share?
- For extra peace of mind – once the lender has retrieved your bank statements, there’s nothing from stopping you from changing your online banking password.
Lending to small businesses is considered high risk due to the amount of small business failures.
Lenders will never lend money without first analysing your business’s bank statement data. It quickly lets them know if you’re good to lend to.
It’s also a fast and effective way for the lender to come to a decision, and saves everyone time (you and the lender).
Most of the analysis is automated, however, in some circumstances the lender may wish to ask you about a certain type of transaction if the automated process flags something to query.
As long as you’re following the advice above, the process of bank statement data retrieval is secure and frictionless.