Cash Flow – Are reviewing business bank statements critical?

When lenders have requested financial statements as part of a small business loan review process, historically they have requested 1-3 years business and personal Tax Returns, and usually an interim Profit & Loss Statement and Balance Sheet.    They have in the past not always and currently often do not ask for the most recent business bank statements.

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

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If the last 6 months business checking account statements are reviewed, they will provide a real time specific indication of the current cash flow of a business, certainly in terms of current balances, beginning balances, ending balances, average balances, # of deposits per month, expenses, and if the company has had any, or 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.

Unless there are other reasons not to request the statements, such as the customer is a long time repeat customer, or the amount requested is clearly small based on the revenues of the company, 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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