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Demystifying Business Financials to Help Secure a Small Business Loan

Posted by Lisa Maas on Friday, February 2, 2024

Demystifying business finances involves a basic understanding of balance sheets, income statements, cash flow statements and more. Get the details.

A Close-Up Of A Small Business Owner Calculating Business Financials To Help With A Small Business L

Balance sheets. Income statements. Cash flow statements. These are all pieces of important financial information that offer valuable insights into your small business’s finances and performance. However, deciphering this information can be daunting. This is especially true if you are a first-time business owner seeking a small business loan from a financial institution. Many banks will require that you have your small business finances in place before they enter into a lending relationship with you.

In this blog post, we will discuss small business bank financing options as well as the important financial elements you need to understand when applying for a loan.

Small Business Loan Options

If you own a business, you may find yourself considering small business financing options, such as a loan. A loan can help you achieve your goal of opening a new retail location, renting more office space, hiring more employees or adding new equipment to expand your product offerings. There are various short-term and long-term loan options, including an equipment loan, real estate loan and working capital loan.

Another common loan option is an SBA Guaranteed loan. They are issued by your local bank but guaranteed by The U.S. Small Business Administration (SBA). The SBA provides resources to help your company get off the ground and grow. While the SBA doesn't directly lend money, it provides guarantees to approved lenders like your local community bank, making it more attractive for them to extend an SBA Guaranteed loan to your small business. This type of loan can help you lay the groundwork for starting or expanding your business. It covers expenses and equipment purchases, helps resolve a sudden cash flow issue and more.

An SBA Guaranteed loan is sought by a lender only if the loan request doesn't meet conventional loan policies. For instance, if you have limited cash on hand for a down payment, or if there are unique risks involved with your business, your lender may look at funding options such as an SBA loan.

When a financial institution evaluates your business for a small business loan, they look at several factors to determine the creditworthiness and viability of your company.

Financial Statements

The financial statement outlined in your business plan provides a snapshot of your company’s financial health. When you’re applying for a small business loan, a business plan demonstrates to lenders that you have a well-thought-out strategy and an in-depth understanding of your business's operations and financials. Here are a few important elements that should be included in the financial statement portion of your business plan.

Balance Sheet

A balance sheet provides a clear picture of how your company's resources are financed. It consists of three main components: assets, liabilities and equity.

  • Assets: Details what your company owns, including current assets, such as cash, accounts receivable, and inventory as well as non-current assets like property and equipment.
  • Liabilities: Breaks down what your business currently owes (accounts payable, short-term debt) and non-current liabilities (long-term debt).
  • Equity: Explains your interest, including stocks, earnings and capital.

Income Statement

An income statement, also known as the profit and loss statement, provides a summary of your company’s total revenue, itemized expenses, gains and losses each month. Stakeholders, investors and lenders use it to measure how well your business is generating profits and whether to invest in or give a loan to your company.

Cash Flow Statement

A cash flow statement tracks the movement of cash into and out of your business. It is categorized into operations, investment and finance activities. Positive cash flow is crucial for day-to-day operations and investments. Following a cash flow management strategy helps in understanding trends and making informed financial decisions.

Debt Disclosures

Debt disclosures provide a roadmap for navigating your company’s financial obligations. They provide information about outstanding debts, including long-term and short-term liabilities. Debt disclosures help small business loan lenders assess your debt repayment obligations and overall financial risk when considering your loan application.

Accounts Receivable and Payable

Managing your accounts receivable (AR) and accounts payable (AP) is critical for maintaining a positive cash flow. AR represents money owed to your company by customers for goods or services. AP represents your company's obligations to suppliers for goods and services. Lenders evaluate how well you manage AR and AP, including making timely payments, maintaining good supplier relationships and incurring late payment penalties. A well-managed AR and AP can positively influence the loan approval process.

Budgets and Forecasts

A budget provides a structured financial plan, outlining anticipated revenues, costs and expenses over a specific period. Lenders, when assessing loan applications, look at your budget to determine your ability to manage finances, allocate resources and achieve financial goals. A well-crafted budget showcases your planning and commitment to your small business finances.

Forecasts, on the other hand, extend beyond budgets to project future financial trends based on market analysis and historical data. This helps you anticipate potential challenges, identify growth opportunities and align business strategies with future financial objectives. Lenders look at forecasts as the potential success and growth of your business.

Don’t Forget About Tax Returns

Filing tax returns isn’t just a regulatory requirement; it’s an essential process when managing your finances. Tax returns provide detailed insights into your company's financial health for a specific period and are an important source of information for lenders when considering a loan. Tax returns also help you identify revenue streams and how to better diversify your assets. Proper analysis of tax returns helps in strategic tax planning and optimizing financial performance.

Every business’s tax situation is unique, so it’s important to work with a tax professional and a certified public accountant (CPA) on your small business taxes. They stay well-informed about current tax laws and regulations so you don’t have to worry about missing critical details or deadlines.

Visit With Your Commercial Banker

Providing complete business financials not only fulfills your lender’s requirements but demonstrates your company’s financial health, stability and ability to repay a small business loan. This comprehensive and transparent financial picture can help foster better communication between you and your community bank. Building relationships with commercial lenders and demonstrating your business's financial stability can help improve your chances of securing favorable financing terms. Bankers can discuss what small business banking services are available and point you to additional financial resources, like the Small Business Development Center.

If you are considering whether a small business loan, including an SBA loan, is right for you, visit with one of our commercial banking experts to learn more.

The Author

Lisa Maas

Lisa Maas

Director of Government Guaranty Lending

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