Bank Statements Are Crucial To Get A Business Loan. Here's Why?

All lenders assess the eligibility of a loan applicant and determine the risk levels before sanctioning a loan. They do this assessment through underwriting, a crucial technique involving research that helps lenders to measure the level of risk and protects their interest. Underwriting depends on numerous factors, including document verification.

The documents that lenders require with a loan application typically include statements of personal and financial information of the borrower. Be it a personal loan or business loan, lenders do a background check of the borrower's financial and personal history to evaluate whether they can take the risk of sanctioning a loan.

The documents requested by lenders differ depending on the type of loan. Irrespective of the type of loan, one important document crucial for loans is bank statements. Most lenders seek bank statements of the previous six months to grant a loan, though in some cases they may require statements of last one year.

Here’s why bank statements are crucial to get a business loan:

Analyzing Cash Balance Of The Applicant

Scrutinising bank statements help lenders to form an idea about the cash balance available in an applicant's bank account. A positive cash balance indicates that the borrower has money available to clear the monthly payments and down payment.

Bank statements reflect the monthly expenses and the net savings, thereby helping the banks to have a general idea about the financial discipline of the applicant. Based on this evaluation banks make sure if the applicant is creditworthy or not. The monthly income of an applicant that gets credited into the bank account also helps bankers to assess the loan amount. The bigger the loan application amount, the higher the balance needed.

Checking Cash Overdraft

Cash overdrafts on bank statements indicate negative cash balances. It happens when borrowers withdraw more money from their account at a given time. Cash overdrafts can be a warning for bankers as the borrower is likely to face difficulty in repaying the loan.

Bank statements of the applicant are used by prospective lenders to analyse if the deposits available in an applicant’s bank account are "sourced”. Deposits add to funds and includes direct deposits, check deposits as well as online transfers. Sourcing cash deposits proves the origin of the deposits.

Lenders also evaluate bank statements to know if the available cash balance is “seasoned”, meaning that the funds are in the account for some time and were not recently deposited there. Both sourcing and seasoning prevents money laundering and assures the lender that the loan amount will not be used to make the down payment.

Assessing Liabilities

Withdrawal from an account happens when money goes out of the bank. Regular business deductions to clear off utility bills, office rent, etc. may be reflected through bank statements. Recurring expense of an unusually large amount from a bank account due to some undisclosed loan or credit card debt also gets reflected as withdrawal. Lenders may often ask for details of these kinds of payments to ascertain if regular withdrawals are higher than regular deposits.

Assessing liabilities is important to gauge if there are adequate liquid funds to meet the closing costs, which may vary from 2% to 5% of the entire loan amount.

To obtain copies of bank statements for business loan applications, applicants must sign-in into their bank account on the bank's website. Lenders must be provided with at least two bank statements to have an idea about the liabilities of the loan applicant. This is because any loan taken for more than two months appears on the previous credit report.

Conclusion

Document verification is an important step to initiate a loan procedure. Apart from tax return statements, proof of business, profit-loss statements and balance sheets, borrowers must provide lenders with their bank statements as proof of financial history. Bank statements reflect the spending habits and cash flow management practice of a loan applicant.

The slightest of negative indications reflected through bank statements of loan applicants is enough to place them in a negative light. Such applicants are tagged as irresponsible and their loan application may face rejection.

Getting to know what documents are needed by lenders to process a business loan makes the loan application process easy. The application process becomes all smoother when taken from a renowned financial institution like IIFL Finance. IIFL requires a few basic documents like address proof, age proof, identity proof along with some financial documents. The application for a business loan can be done online or by visiting the nearest IIFL Finance branch office.