Financial Reports To Run Before Pursuing A Business Loan

A business Loan is a crucial tool to help you realise your business goals. Banks and other financial institutions have a list of documents that they look at while reviewing your business loan application. 

Before you apply for a business loan, it is essential to understand these requirements and ensure they are in the best possible condition. This is even more important for you if you are a first-time applicant or do not have a standing relationship with the financial institution. 

While the list of documents is long, there are some vital financial reports that financial institutions look at to decide whether to approve your business loan or not.

Bank Statement

Financial institutions generally insist on bank statements of the previous six months to understand the nature of financial transactions as an indication of the business’ health. It is a standard practice to keep personal and company accounts separate. Most sole proprietorships can make the mistake of having a single account, which creates many problems. An emerging trend is that financial institutions insist on getting a private limited 

company incorporated before giving a loan.

Income Tax Returns

Businesses incur various costs in line of functioning. Costs can be under multiple heads like salaries, rent, depreciation, marketing expenses and interest paid on loans if any. Income Tax Returns, or ITRs, show the calculation of income after deduction of various business expenses. Financial institutions require ITRs of the previous 2-3 years to handle the business performance. These ITRs show computation of income, which is also vital for financial institutions to assess the fitment of your business loan application.

Balance Sheet

Every business needs to have a balance sheet, which accounts for the assets, liabilities and shareholder capital. While it is easier to create a balance sheet for a manufacturing business, a service business has a balance sheet that reflects differently. However, it will still have a balance sheet. Financial institutions ask a company for a balance sheet of at least two years for two reasons: to better understand the growth of the business and see how the assets and liabilities have been utilised to create value for shareholders.

Profit & Loss account

A profit & loss account has all the critical information about the gap between revenue earned by the business and expenses incurred while running it. While losses give a negative perception, profits indicate the goodness of health of the company. Financial institutions consider this as perhaps the most important financial document for assessing a business loan application. They ask for at least two years of P&L accounts to understand how the business is performing and how the revenue is used.

CIBIL Report

A CIBIL report, or any similar credit history report, contains the track record of prior liabilities and repayments of the business or the business owners. The credit history needs to be impeccable. If you are applying to get a business loan for the first time, as a business owner, your credit history will be crucial in securing the business loan.

Conclusion

It must be noted that financial documents are considered valid only if they have been audited and certified by a Chartered Accountant. You may need to submit proof of continuation of business such as ITR, Shops & Establishments Certificate.

For various purposes, you may require a business loan. You can look at availing a business loan facility from a trustworthy lender. A business loan at reasonable interest rates can help you go a long way, no matter your business.

But before taking any such loan, you can check the current business loan rates of interest on the lender’s website. Make sure that you plan your business cash flows to sustain the burden of EMIs; an online business loan EMI calculator can help you with that.