Business Bank Statement – Beyond Average Balances

Definition of a Business Bank Statement:

A bank statement in the name of a Business.  It will have the name of the business on the statements.

Lenders use the total cash flow in your last 3 months Business bank statements to make an offer.

They also review the number of deposits per month, average daily balances and consistency month to month.

Number of Deposits per Month – In general, when a business has a larger number of deposits per month deposited to their account, the more likely they are to have more customers, which diversifies, and lowers risk.    If a company does have a larger number of customers, then the loss of any one customer may have less of an impact than for a business that has fewer customers.

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Also, more frequent deposits may allow a business to have a more flexible cash flow, as they will less often need to wait to pay various expenses.

Other Considerations:
Monthly Loan or Lease Payments
– Loans, lease or advance payments should be looked for in a business bank statement.

If a bank statement reflects numerous month ACH payments for loan and leases, their monthly debt obligations and debt to income ratio may be called into question and reviewed more closely.

Itemized monthly expenses – Review the actual expenses that the company has.    Some expenses will clearly be necessary and business related, others maybe not be.     This review may shed light if the company is conservative with their funds or is too free spending.    Some common expenses to look for:

– Frequent and / or expensive restaurant outings
– Spa or Club treatments
– Golf Outings
– High end resort expenses

Some of these expenses may be related to clients.   Look closely at several months expenses to determine if there is a pattern.

Having tax returns and interim Profit & Loss Statements are critical, but they are a snapshot in time several months or years in the past.

Business checking account statements will shed light on the company’s cash flow at the present time, which may be the best barometer of their ability to service a new debt obligation.

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Cash Flow – Are Reviewing Business Bank Statements Critical?

Lenders may request financial statements for a small business loan application.

If so, they request 1-3 years business and personal Tax Returns and also an interim Profit & Loss Statement with a Balance Sheet.

They often do not ask for the most recent business bank statements.

However, is reviewing a business’ bank statements critical to the review?

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If the last 6 months business checking account statements are reviewed, they will provide a real time information.

This includes the current cash flow of a business, current balances, beginning balances, ending balances, average balances, # of deposits per month, expenses.

It will also show if the company has had significant insufficient funds or overdraft activity.

The tax returns, while very detailed and provide significant financial information that business bank statements do not provide,  are still a snapshot of a company’s financial condition that is at 4-12 months old.

If it is the previous years return, it is at least 16 – 24 Months old.

If the Personal Financial Statement of the owner is requested, a cash on hand figure will be provided, though this too is often months old.

If the additional new debt service being considered is,  as an example, $1,500 per month, then if a company keeps steady average business bank statement balances of $10K – $20K in the past 6 months, will have a stronger likelihood of being able to easily service the new debt.

Conversely, if the company keeps average balances between $1,500 to $5,000, then there may be greater stress on the company to service the new debt.

Requesting the last 3-6 months business bank statements will greatly assist lenders in assessing a businesses real time cash flow.

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Does showing a profit dramatically help businesses get loans?

The vast majority of business owners want to show the lowest profit they can on their financial statements and tax returns in order to have the lowest tax liability possible.

However, the primary reason they may in fact want to show a profit on their tax returns is if they see the need to secure financing 2 or 3 years in the future.

Very few business owners consider this point and very few Accountants tell their customers to consider future financing requirements.

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But is not discussing this in the long term interest of the customer?

One of the main reasons few Accountants will discuss showing a profit on the tax returns with their customers, is because it is clearly a very unpopular subject, since the consequence is a higher tax liability.

Accountants feel if they suggest the benefits of reflecting a profit, which will mean paying higher taxes that year, their customer will look for another Accountant.

There are several reasons not discussing this can significantly hurt the customer.

If the customer decides to get a business loan or some other type of business financing, their financials will in many cases be requested, especially if the requested amount is higher, over $50K to $75K, though sometimes even as low as $20K or $25K.

Once the financials are requested, the chances of an approval after having submitted 2 Years Tax returns that show a low net income, or even a loss,  are very low.

The customer will very likely be declined for insufficient cash low, among other reasons.

For a business that is finally in the position to expand, enter new markets, hire additional staff, increase their inventory or advertising, all of which is designed to bring in additional revenue, this can be devastating.

These are really the biggest long term goals of any business.   Since a very high percentage of businesses intentionally show a low net income or loss, these business owners are surprised when their financials and tax returns are requested.

They may be declined for business financing due to insufficient business income and cash flow.

As a result, business owners that know that working capital and financing will be critical in the next 2-3 years should report a healthy net income on their business returns.

More Small Business Loan resources:

Public Radio Planet Money – All issues money related to the public.

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Are Financials Required on a Leaseback?

Financials are not always required on a leaseback.    However, if a company’s financial and bank statements are strong, then they will want to provide the information.

5 figure and higher beginning, ending and average balances are the starting point to be considered strong for bank statements.

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Another unusually roadblock that may occur is if the loan officer or credit officer indicates that bank statements and financial statements are not required for a leaseback or other types of financing.

If this happens and you know your financials and bank statements are strong, tell them that you want to provided them, even if they are not required, because they are strong and may well help the request.

Sometimes some less experienced loan officers may still indicate that the are not required.   If this happens, persist and insist on submitting them.

Small Business Loan Resources:

Public Radio Planet Money – All issues money related to the public.

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Small Business Company Structure

The type of company structure a business chooses is important when the company needs a small business loan.   Many business owners start with a sole proprietorship, incorporating later.

Retain all business licenses, business checking account statements and tax return information since the inception of the business to prove time in business, which will be important for the business over time.

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Incorporating immediately is typically a better choice because the business will be listed prominently on the secretary of state records.

By incorporating immediately, any other entity your company deals with will have an easy, fast way to see your full time in business with the state records.   Time in business is one of the key factors when business credit is evaluated.

The main issue often cited by business owners when it comes to which type of business structure to choose is liability.   The officers of the business do not want to have personal liability for any issues related to the company.

If the business gets involved in legal issues, bankruptcy issues, civil or criminal issues involving the operation of the business, the owners want the maximum separation to protect them.

This is best accomplished through either the S-Corp, C-Corp of LLC company structure format.    If the business is small, the S-Corp may be the best choice for businesses with less than 35 Employees.

If the business is a single member,  then the LLC, Limited Liability Corporation may be the best choice when setting up the business structure.

If the owners chooses a Sole Proprietorship or Partnership, they leave themselves open to litigation or debt collection problems.

Small Business Loan Resources:

More Small Business Loan resources:

Public Radio Planet Money – All issues money related to the public.

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