If your business really needs a cash injection to grow, then one of your best options is to apply for a small business loan. There’s just one problem—getting approved for a small business loan can be tough. Lenders aim to minimize risk by ensuring you can afford to repay your capital, plus interest.
One of the ways lenders determine how likely you are to repay is by looking at your small business track record, demonstrated best through your financial reports. We’ll dig into the main information that lenders are looking for, and how to use those reports to maximize your chances of getting a loan.
The Small Business Profit and Loss Report
This report shows how you are receiving and spending money in your business.
What Your Profit and Loss Report Does
Your profit and loss (P&L) report takes information from elsewhere in your small business, like your invoices, bills, and expenses, and categorizes all of your business transactions. It then shows how much money you have taken in (revenue), how much you have spent (expenses), and the money that’s left over (profit or loss).
The Information That Creates the Profit and Loss Report
The P&L report typically comes from the invoices you issue or goods and services you sell. It then takes account of any expenses you have, like utilities or employee wages. All of these transactions come from your business bank account and will be “reconciled” against other parts of your accounting as part of your bookkeeping.
How Lenders Use the Profit and Loss Report to Decide on Whether to Lend
Lenders will use your P&L report to see how much “free” cash (profit) you have available in your business once you’ve paid all of your expenses.
Typically, lenders want you to show a profit each month, which allows you to easily make repayments on your loan, even if your business income declines. Lenders may also dig into your P&L report further to examine areas like fixed costs, variable costs, high-spending categories, or different revenue streams.
How To Improve Your Profit and Loss Report for Loan Approval
To increase your chance of small business loan approval, you need to increase your profitability. There are two main ways to do this:
- Increase your revenue, which reduces the impact of fixed expenses.
- Reduce your expenses.
Fortunately, we have three detailed guides to achieve this.
- Great Ideas to Cut Your Small Business Expenses
- Reduce the Hidden Costs of Running a Small Business
- Ways Small Businesses Can Keep Overhead Costs Down
The Small Business Balance Sheet
This report shows how much your business owns and owes at a particular point in time.
What Your Balance Sheet Does
Your balance sheet is a snapshot report that collects together information about the financial state of your business at a particular point in time—normally at the end of your fiscal year. The balance sheet is divided into three main areas:
- Assets: What your business owns—including money in bank accounts, equipment and vehicles, accounts receivable, etc.
- Liabilities: What your company owes—including bills due, accounts payable, and debts.
- Equities: The shareholder’s stake in the company—including your stake, and anyone else’s.
The Information That Creates the Balance Sheet
The balance sheet is calculated from the balances you have entered into your accounting software, and how they have changed over time. You will have entered an “initial balance” for your business bank account, then, all of the transactions into and out of that account will adjust that balance up or down.
Your accounting software then consolidates all of this information together to provide a total.
How Lenders Use the Balance Sheet Report to Decide on Whether to Lend
Lenders will examine your balance sheet to see how much cash you have on hand and how much is tied up into your equipment and other assets. They will also look at your debt and other liabilities to see how much you owe elsewhere.
They want to verify that you have enough free cash overall to manage your loan repayments. If necessary, they may even require collateral shown on your balance sheet to secure your loan.
How To Improve Your Balance Sheet
It’s important to keep a healthy balance in your bank accounts and other short-term, liquid assets that you can use to meet your short- to mid-term financial commitments. This may mean holding onto a little more of your cash each month, or shortening your payment cycles.
The Small Business Cash Flow Statement
This report shows the money coming into and going out of your small business and your overall financial health, in more detail than your P&L.
What Your Cash Flow Statement Shows
Your cash flow statement combines information from your P&L, balance sheet, and other areas to show the inflow and outflow of money through your small business. It shows how well you can manage cash and the actual amount of “free” money left over each month that can be directed to loan repayments.
The Information That Creates the Cash Flow Statement
The typical elements of a cash flow statement are:
- Your net income that you have received through selling goods and services less money paid to suppliers and other operational costs, less money paid to employees through salary and payroll.
- Your depreciation, based on the reduced value of your assets over time.
- Other gains and losses in your business.
- The overall cash generated from business operations.
How Lenders Use the Cash Flow Statement to Decide on Whether to Lend
Lenders want to see that you have an overall positive inflow into your business, and high enough so you can make repayments without problem. Keep in mind that this includes areas like depreciation and other gains and losses that may not have been included in other reports.
How To Improve Your Cash Flow Statement
You can improve your cash flow statement by enhancing your profit margins, and ensuring you retain value in your business assets.
Understanding and optimizing these three financial reports will significantly improve the likelihood that you’ll be approved for a small business loan. We also have a complete guide to all of the other areas you need to know to maximize your chances of approval.