The Importance of Financial Statements to Loan Approval

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Key Takeaways

Key Point Description
What are Financial Statements?
Financial statements (financials) are essential records detailing a company's financial performance, including historical profit and loss and assets and liabilities. Lenders rely on them to gauge a business's ability to repay loans, while borrowers utilise them to demonstrate their financial health, increasing the likelihood of loan approval with favourable terms.
The Importance of Financial Statements
Financials offer lenders a comprehensive view of a company's performance. Through financial statements, lenders can assess a business's profitability, balance sheet equity and debt serviceability.
Financial Information Required to Prepare for Application
In addition to financials, businesses may be asked to present bank statements, business activity statements, tax returns and tax portals. In some cases, the business owner's personal financial statements may also be scrutinised. Non-bank lenders tend to request less information and unsecured lenders often do not require any documentation.
Is it Possible to Get A Loan Approval without Financial Statements?
Yes, it's possible to get loan approvals without financials. Many lenders, typically non-bank lenders, have low or no documentation loans.

To get a business loan approval borrowers must demonstrate to lenders they are financially capable of repaying the loan. To do that many lenders require you to present financial statements, referred to as financials, along with other requirements. Financials are lenders’ key to understanding a business’s financial behaviour and history. Let’s examine what they are and their importance to loan approval.

What are Financials?

Financials are accountant-prepared documents that provide comprehensive information about a company’s financial performance, profitability and equity position. These documents are essential for both lenders and borrowers in the loan process. For lenders, financial statements are important tools for assessing the ability of a business to repay a loan. On the other hand, borrowers can use these statements to present an accurate picture of the financial results and attributes of their business.

The Importance of Financial Statements

Here are some of the main reasons why financial statements hold importance when it comes to loan approval:

 

  • Assessment of Financial Performance: Financials provide lenders with a detailed look at a company’s financial health, including its assets, liabilities, equity, income, and expenses. Lenders use these documents to evaluate whether a business has the attributes required to repay a loan.

 

  • Profitability Analysis: Lenders are interested in understanding a business’s profitability as it’s from positive cash flow that’s required to repay any lending. 

 

  • Debt Servicing Capacity: Financials help lenders evaluate a company’s ability to service its debt, which includes making regular interest payments and repaying the principal amount. 

 

  • Balance Sheet Equity: A company’s balance sheet demonstrates its solvency by setting out its assets vs. its liabilities.

 

  • Management and Strategy Insight: Beyond the numbers, financials can also give lenders insight into the company’s management. This can affect a lender’s confidence in the business’s ability to navigate future challenges and opportunities.

What Are The Main Parts Of Financials?

  • Balance Sheet: The balance sheet provides a snapshot of your company’s financial position at a specific point in time. It details your business’s assets, liabilities, and shareholders’ equity. 

 

  • Profit and Loss Statement: A profit and loss statement shows a company’s revenue, expenses, profits, and losses within a certain period. 

Other Financial Documents

 

  • Bank Statements: Lenders may ask to look at a business’s bank account statements to see its monthly transactions. Bank statements can give lenders insight into a business’s spending activities by looking at its deposits, withdrawals, and other charges.

 

  • Business Activity Statements (BAS): The BAS helps businesses report on their taxes like the Goods and Services Tax and their PAYG. Some lenders may ask for a business’s activity statements to verify income.

 

  • Business Tax Returns: While not a traditional financial statement, tax returns from the ATO are often required by lenders to validate a business’s income and expenses. Tax returns provide a look at the history of a business’s financial performance and are used to cross-check the information presented in the financials.

 

  • The Business Owner’s Personal Documents: In some cases, lenders ask for the personal financial statements of the business director. These include their ATO Notices of Assessment, a statement of position, and other supporting documents. 

Get Business Loans With or Without Financial Statements

Although financial statements are vital tools for bank loan assessments, not all lenders will require them. Other lenders, typically non-bank ones, will offer low or no-documentation loans for businesses that need them. Instead of asking for financials, lenders will look at the business owner’s assets and liabilities and their loan exit strategy. In some cases, lenders may require properties and assets to secure the loan and mitigate risk. Low or no-doc loans are perfect for startups, sole proprietorships, and businesses with less ideal credit history. Borrowers can get funds quickly, but they must be aware of typically higher interest rates and more restrictive terms. 

To Get The Best Unsecured Loan for Your Business Work with darkhorsefinancial.com.au

Whether you have financial statements to present to lenders or not, there are plenty of loan options for you and your specific situation. If you need help looking for the right lenders and the best terms, don’t hesitate to contact us. Darkhorsefinancial.com.au are loan experts that can show you the way.

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Case Study: $1.1M Private Loan to a Commercial Construction Business

Prior to COVID, our client had a thriving commercial plumbing business. Like many in the industry, the pandemic hit hard, with reduced contracts and delayed payments leading to financial strain. However, as the market picked up again post-COVID, their numbers began improving steadily. Still, the burden of the pandemic remained in the form of costly, self-sourced loans that created a significant drain on their cash flow. On top of this, the business had accumulated $1M in tax debt. The client was faced with two potential solutions: consolidate their existing debts into a more manageable loan or consider restructuring the business entirely. With the future looking brighter for their business, consolidation became the preferred choice. Their turnover and cash flow were strong enough to support a $1.1M unsecured loan over five years. However, while loans of up to $250,000 can sometimes be obtained without the need for extensive documentation, larger loans – particularly unsecured ones – typically require financials. The company’s financials had taken a hit during the pandemic, and with losses on the books, the unsecured option was off the table. The Tailored Solution: Secured Loan with Capitalised Interest Recognising these challenges, we adopted a two-step approach to provide the client with the financial relief they needed. First, we secured a $1.1M first mortgage loan, backed by property as collateral. By securing the loan against property, we were able to access a more flexible and favourable lending option that allowed the business to maintain liquidity. One of the key features of this solution was the decision to capitalise the interest on the loan. This strategy meant that the interest accrued on the loan was added to the loan balance rather than requiring regular interest payments to be made. For the client, this provided two key benefits: Cash Flow Relief: By capitalising the interest, the client was able to redirect their available cash flow to more pressing business concerns, including paying down their $1M tax debt. This approach allowed them to stabilise their financial situation without the immediate strain of servicing both the tax debt and the loan simultaneously. Flexibility for the Future: The capitalised interest approach also created breathing space for the business to recover from its pandemic-related losses. By the time the interest needs to be repaid, the business is expected to be on even firmer financial ground, with stronger cash flow and better financials. This would enable them to refinance the loan or even explore unsecured lending options once their financial situation improves. Why This Loan Was the Right Fit In this case, the combination of a first mortgage loan with capitalised interest was crucial in allowing the business to address its immediate challenges while providing room for future growth. Here’s why this was the ideal solution: Secured Loan with Lower Interest Rates: By securing the loan against property, the business was able to access a loan with a lower interest rate than would have been possible with an unsecured loan. This ensured that the overall cost of borrowing was manageable, despite the larger loan amount. Avoiding ATO Enforcement: The capitalisation of interest gave the business the breathing space it needed to focus on paying off its tax debt. This is significant because it helped them avoid any potential enforcement action by the Australian Tax Office (ATO), which could have included garnishing accounts or placing liens on assets. 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After one year, the business could refinance the loan under more favourable terms or secure unsecured financing once they’ve demonstrated improved financials. Tailored Solution for Unique Challenges: This loan was structured with the unique challenges of the business in mind. The post-COVID recovery created an opportunity for growth, but also highlighted the need for a financing solution that wouldn’t strain the business’s resources. A first mortgage, combined with capitalised interest, was the perfect balance between providing necessary capital while keeping short-term obligations low. Strategic Debt Management: By choosing consolidation over restructuring, the business retained full control over its operations while addressing its debt obligations. This solution also ensured that their tax debt was managed, reducing the risk of future penalties or enforcement action. 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Key Takeaways Doctors are considered low-risk borrowers by many lenders. Thus they have access to a wide range of financing options with competitive interest rates, flexible terms, and high loan amounts to support both business and personal financial needs. Some reasons why doctors need loans include purchasing commercial property, purchasing equipment, securing working capital, debt consolidation, further education, and more. Medical business loans are versatile loan products that can cover a range of business expenses, including staffing, marketing, and emergency expenses. Medical practice loans are ideal for doctors looking to acquire, expand, or renovate a medical practice. Medical equipment loans are for purchasing or leasing medical equipment, and helping doctors stay up-to-date with the latest technology without draining working capital. Doctors can access personal loans for managing personal expenses, debt consolidation, home improvements, or continuing education. 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