Bank Statement Business Loans

A business bank statement loan lender relies only on the company’s bank statements to qualify the borrower.

Author: Brad Nakase, Attorney

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What Are Bank Statement Business Loans?

As discussed in the introductory section, business bank loans are a type of loan that is based solely on a business owner’s bank statement. That said, these loans are usually only offered by certain types of lenders – usually, online alternative lenders.

Bank statement loan requirements vary slightly, but a business owner will typically need to provide the following to receive one of these loans:

  • Three to six months of business bank statements
  • Records of investments or assets
  • Proof of business ownership
  • Business license
  • Tax returns
  • Voided business check
  • Driver’s license
  • A minimum credit score of 600

Bank statement lenders will also want to confirm a business’ bank statements using a proof of deposit. They will also probably want details about the account including the account number, balance, and the names included on the account.

Bank statement loans tend to have higher interest rates, lower loan amounts, and shorter loan terms as compared to traditional loans. That said, if a business’ financial information is not well-established, then bank statement loans may be the best option. The approval criteria for this type of loan are much less strict than that for traditional loans. Also, the lower loan amounts are not usually a problem for new companies.

Why Do Lenders Require Bank Statements?

Lenders ask for bank statements for a number of reasons, the primary one being that lenders need to confirm that the borrower meets their lending requirements. Bank statements hep lenders confirm this because the statements demonstrate to lenders how much money is coming in and going out of a business owner’s account.

Unlike a business owner’s financial reports, bank statements are issued by a trustworthy, outside authority. Bank statements provide lenders with the resources they require to confirm the legitimacy of the business owner’s financial statements. Essentially, this is why bank statements are the critical part of a loan application.

Because of their importance in a business lender’s loan application, this article will explore why lenders like to have bank statements. This article will also review bank statement red flags, as well as explain how lenders make use of bank statements to check financial reports. And finally, we will discuss bank statement business loans, which is a type of financing that is based entirely on a business’ bank statements.

How Does a Lender Evaluate Financial Statements? There are three primary documents that a professional lender evaluate:

  • Income statement: reports company revenue and expenses over a period of time.
  • Balance sheet: reports company assets, liabilities, and equity over a period of time.
  • Cash flow statement: reports a summary of the amount of cash flowing into and out of the business.

Considered together, these three documents offer an overview of a company’s capital structure and financial performance. Lenders will study these statements to figure out some important financial ratios, which will be described in the following sections.

  • Debt-to-Cash Flow Ratio

This is a metric that measures a company’s cash flow compared to its amount of debt. It is calculated by dividing a company’s debt by its cash flow. Basically, this number measures how long it will take for a business owner to pay off any debt.

  • Debt-Income-Ratio

According to Wells Fargo, lenders use the debt-to-income ratio (DTI) to determine the risk a business owner poses by taking on another payment. The DTI ratio calculates the portion of a business owner’s gross monthly income to his or her monthly payments. Lenders consider this ratio to be important because it reveals how much of a business owner’s monthly income is devoted to payments. This information allows lenders to figure out how much more in payments a business owner can reasonably afford.

  • Quick Ratio

The quick ratio metric figures out how much liquid assets a company has to pay off its short-term debt and obligations. It is calculated by subtracting inventory from a business’ current assets and dividing the sum by the business’ current liabilities. In essence, if all a business’ current year debt obligations were due at the same time, this number tells lenders the business owner’s ability to pay them off.

Bank statements not only help verify a business’ financial reports, but they also help lenders calculate these important metrics. As will be discussed in the next section, bank statements are so critical in the loan application process that some types of loans only ask for bank statements.

What Are Some Bank Statement Red Flags?

A lender will first check three basic things on a business owner’s bank statements. These are:

  • The account balance
  • The frequency and amount of withdrawals
  • The frequency and amount of deposits

Ideally, lenders would like to observe a high account balance and a healthy ratio of withdrawals to deposits. If a business owner has a large number of withdrawals but only a few deposits, then this signals to the lender that the owner is spending more than he or she is making. A borrower who spends more than they make does not represent an attractive loan candidate.

This will not prevent a business owner from being approved for a small business loan, but a lender may ask for an explanation of this poor ratio.

Conclusion

If a business owner is interested in a bank statement loan program, there are some similar financing options to think about. These options include a merchant cash advance (MCA), accounts receivable financing, and a line of credit from an online lender.

Each of these choices functions differently than a bank statement loan, but all of them have similar credit and documentation requirements. Thus, if a business owner qualifies for a bank statement loan, then he or she may also be eligible for these bank statement loan alternatives.

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