If there’s one common document all banks will want to see a tick marked on that application checklist, that would be your bank statement.
When applying for a SME loan in Singapore, your bank statement is a mandatory document almost all banks will require for credit assessment.
A bank statement gives the lender a preview of your business activity within a specified time range. Apart from a condensed info about your business’ account – the beginning and ending balance for that period, it reveals intervening transactions – deposits, withdrawals, bank fees and other charges paid, in a chronological fashion.
You might be curious why a potential lender would still ask for your business’ bank statement when in fact you’ve turned over substantial supporting documents. Aren’t credit reports, financial statements, tax statements, personal identification documents enough?
Unfortunately, they’re not. A potential lender will tell you straight to hand over your bank statement otherwise, he’ll can’t process your loan application or worse, reject it. Sounds threatening?
Bank statement is a mandatory document for business loan credit assessment and the truth is, without it the loan processing officer can’t even help you to put up the application to credit approval team. Most banks will require your latest 3 to 6 months bank statements for business loan application.
A lender wants to see how well you manage your business’ cash flow and will ask you to comply with all their documentary requirements, including a bank statement.
But why do you have to present your bank statements? What exactly do they want to see on your bank statement? Here’s what they’re looking for.
Basic verification and due diligence checks
Your bank statements would usually bear your company’s name, the name of bank your business is banking with and most importantly the mailing address where the bank statements are going to.
These are standard basic hygienic checks that all banks do to verify the authenticity of the bank statements and the company.
If the mailing address reflected in the bank statements furnished is not the same as your business’s registered address nor your personal residential address, you might need to share with your lender why so.
Some small businesses do forward mailing address of their bank statements to their outsourced accountants or auditors address directly.
Some have multiple business locations or branches and the registered business address and bank statements mailing addresses are different branches of the business.
As long as you could share with the lender reason why mailing address and registered address differs, this is usually a small issue.
Positive cash balance
First off, it’s a given that your cash balance must be positive. A negative cash balance in a bank statement says you’ve poorly managed your cash. It paints a picture of you as a potential delinquent borrower because you’ve allowed your cash levels to drop to uncomfortable levels. Whether this was a plain oversight or intentional, it doesn’t matter. It still is a red flag.
While having maintained a positive cash balance suggests that you could be a responsible borrower, a lender will still want to review your average daily balance. He’ll want to scrutinize the incomes flowing into your business. Even if there appears a huge, windfall type of income (large chunky one-off deposits), banks’ credit approver will direct attention to the ordinary incomes that regularly flow into your business.
They might also compute for your average daily balance assuming there were no windfall types of deposits.
So what is the purpose of this exercise? The bank wants assurance that you have an effective cash handling management process in place and keep a healthy cash position most times.
The next logical question would be what’s a healthy cash balance in the eyes of a potential lender? It depends on the value of the loan you’re going to avail. Understandably, lenders will want to see a higher cash balance when you are availing of a bigger loan amount.
As a rule of thumb, the higher the better. Anything less than $10k average daily balances maintained would be considered low.
A lender will always check the nature of deposits you have, where they’re sourced, and how often they occur.
Consistent and frequent deposits are one of the tell-tale signs that your business may be operating profitably. These deposits could be revenue from cash sales or receivables collected regularly. It also suggests that business is brisk and that revenues come in steadily due to new and recurring sales transactions.
But what if your bank statements reveal otherwise? If your most recent deposit was months ago, a potential lender might think that your business isn’t turning out enough profits for it to get by and this could be a point against you.
After verifying what’s flowing into your business account, of course, he wants to see the other component of your bank statement – your withdrawals.
It is natural to incur withdrawals for as long as they don’t deplete your cash balance to unmanageable levels. It is good if withdrawals are immediately replenished by deposits. If you are applying for a loan, it is best to continue making deposits but avoid making huge withdrawals during the preceding few months before loan application.
Periodic regular withdrawals with the same amount from your business account are evidence that you have entered into a transaction that requires you to make consistent, regular payments. In many cases, this points to a possible loan or credit transaction.
Evidence pointing to an existing loan obligation won’t necessarily reduce your chances of getting approved. However, expect a potential lender to conduct an inquiry to find out the amount of your remaining balance and if you are up-to-date on your payments.
Returned cheques due to insufficient funds is also a critical red flag to almost all banks. If there are too many instances of returned cheques, it’s almost quite certain it will not pass through credit approval parameters.
Most banks will not be able to accept more than 2 returned cheques over last 6 months. Returned cheques due to technical errors such as wrong dates or signature are fine and can be easily verified via the running balances reflected in bank statements.
If you find your bank statements constantly overdrawn and cheques being returned, you might like to take up a revolving line of credit such as business overdraft to buffer for such situations. Of course, you should only apply for the overdraft after you clear up your latest 3-6 months bank statements which does not reflect any negative balances.
Clean bank statements
Apart from your business’ cash balance, deposits, and withdrawals, your bank statement also reveals info like incidences of overdrafts. Overdraft fees charged on your account are reflected in the statement. When the lender spots this, he might require you to explain why the statement went into excess and supporting documentation if any.
Now, this is your chance to explain in detail why an overdraft happened. You should indicate a brief narrative of the incident as well as relevant info including dates, account number, and the name of the creditor.
Emphasize that a solution has been done from your end to avert such occurrences in the future. You may also attach supporting documents when required such as a cancelled check.
While an explanation to mitigate overdrafts in bank statements may be useful if it was indeed due to genuine legitimate oversight, maintaining a “clean” bank statement is still the best route to secure business loan approval.
With the current lacklustre and slowing economy, it is tougher for SMEs to access financing as banks tend to tighten credit in bad times. In such scenarios, it is even more important to keep your financials and bank statements as “clean” as possible to improve chances of approval should you require a loan.
Lenders will evaluate your business loan proposal based on your company’s overall credit rating as a potential borrower. Approval or rejection isn’t hinged on one document, let alone a bank statement. There are many factors to consider for small business loan requirements and bank statement analysis is just one of them.
However, never undermine the value of a bank statement and the picture it presents of you and your business. As the saying goes, “How you do anything is how you do everything”.
A clean bank statement without a tinge of overdrafts, regular deposits, and a healthy cash balance could demonstrate how well you’ll do as a borrower. Keep this in mind and eventually, you’ll get the lender’s nod in no time.