Before you proceed with a business loan application, it is imperative to gather information about the documents needed by your lending institution. Balance sheet, ITR, and bank statements are some of the important docs that lenders look for while approving business finance. They are carefully studied to determine a company’s ability to repay the loan.
The balance sheet plays a particularly important role here, as it helps assess the financial health of your business. Internally, balance sheets are employed to steer management decisions, and they are externally used to inform lenders, stakeholders, and investors about your business’s financial status.
What is a balance sheet?
In essence, the balance sheet is a financial statement comprising the organisation’s assets, liabilities, and capital at a specific point in time. It is usually calculated quarterly, semi-annually, or annually. Liabilities and equities are listed on one side of the balance sheet, and they sum up to equal the assets which are listed on the other side of this sheet.
This sheet helps track your business’s finances and give the information needed to sustain and grow your business over a period of time. Apart from being beneficial for your company, balance sheets also serve as useful tools to lenders. They use it to measure your business’s creditworthiness and financial situation. This way, they can understand how their funds will be utilised and the ability to pay back the loan.
Importance of balance sheets for business loans
You may be asked for more than one balance sheet to get a better estimate of the business’s financial ups and downs. This track record will determine your loan amount and business loan interest rate. For example, if the company depends on short-term cash credit, it can be problematic as this credit renewal is not assured.
On the other hand, if the balance sheet displays positive cash flow, intelligent working capital, income-generating assets, and a balanced capital structure, you are more likely to secure business finance at affordable interest rates.
Other important documents
Along with the balance sheet, lending institutions also study the business’s cash flow statement containing sources and details of cash inflows and outflows. This helps determine how your business produces cash to fund its operations and pay its debts. Income statements or profit and loss statements are also essential as they show how much the business has spent and gained in a time interval.
These financial statements are vital for a company to take avail business finance or form economic partnerships. They monitor your business’s money and show the current financial status.
So, before applying for business loan, check your business loan eligibility, carefully compile required paperwork, including balance sheets and get the necessary funds smoothly. Remember, incomplete paperwork from your end can delay the approval process, which is otherwise quite fast.