Loan Preparation / Business Credit

How to Read Your Financials Before You Apply for a Business Loan: What Lenders Actually Look At

A practical walkthrough for owners on what underwriters assess: balance sheet, income statement, cash flow,
liquidity, debt service coverage (DSCR), industry ratios, credit profile—and how to package your file so you look bankable.

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business loan readiness
financial statements
lender criteria
cash flow analysis
underwriting

Quick Readiness Checklist

12–24 months business bank statements with clean average balances and minimal NSFs.
Last 2 years business tax returns + YTD financials (through last month) with accrual consistency.
Balance sheet that ties to your tax return year-end; no “mystery” shareholder loans.
Income statement with stable or improving margins; add one-time adjustments clearly.
Cash flow showing coverage of target payment ≥ 1.20x DSCR (preferably 1.35x+).
AR/AP aging & inventory turns if applicable; seasonal notes if you’re cyclical.
Clear use of funds (growth, equipment, refinance) with ROI logic.
No active MCA stacking or daily drafts—have a plan to cure if present.

Present your numbers like an underwriter would: reconcile, label adjustments, and eliminate ambiguity.

The Big Three Statements

1) Balance Sheet

Underwriters test liquidity, leverage, and capital structure health.

Assets: Cash, AR (net of bad debt), inventory realism, fixed assets net of depreciation.
Liabilities: Credit lines, term debt, MCA obligations (even if “receivables purchase”).
Equity: Retained earnings trend; owner draws vs contributions.

2) Income Statement (P&L)

Revenue quality (customer concentration, repeatability).
Gross margin stability; COGS discipline.
Operating leverage: EBITDA margin, payroll % of sales, rent/utilities trend.
Normalize by removing one-time items and non-operating expenses.

3) Statement of Cash Flows

Operating cash flow vs net income (earnings quality).
Capex needs and debt amortization load.
Working capital swings (AR, inventory, AP) and seasonality.

Key Ratios & Metrics (What Lenders Actually Calculate)

Metric	Formula	Target	Why It Matters
Current Ratio	`Current Assets / Current Liabilities`	≥ 1.2x (many banks want 1.3–1.5x)	Baseline liquidity. Shows you can meet short-term obligations.
Quick Ratio	`(Cash + AR) / Current Liabilities`	≥ 1.0x	Stricter liquidity excluding inventory.
Debt-to-EBITDA	`Total Interest-Bearing Debt / EBITDA`	≤ 3.0x (industry dependent)	Overall leverage vs cash earnings.
Debt Service Coverage (DSCR)	`(EBITDA ± Adjustments) / Total Annual Debt Service`	≥ 1.20x (banks prefer 1.25–1.35x+)	Ability to cover all required debt payments.
Gross Margin	`(Revenue − COGS) / Revenue`	Stable or rising	Pricing power and cost control.
Fixed-Charge Coverage	`(EBITDA − Capex) / (Debt Service + Rent)`	≥ 1.10–1.25x	Coverage including rent and capex drag.
AR Days	`(AR / Sales) × 365`	Near industry norm	Collections efficiency; cash conversion.

Adjust “EBITDA” for clearly documented one-time items only (e.g., one-off legal fee). Label everything.

Bank Statements: What They Reveal in 30 Seconds

Average daily balance: Trending up or down? Consistency beats spikes.
NSFs/overdrafts: More than 1–2 in a 90-day window is a problem.
Deposit composition: # of deposits vs large lump sums; recurring revenue wins.
Daily/weekly debits: MCA drafts are a red flag—address/exit plan required.
Tax payments: On-time remittance shows discipline (payroll/sales tax).

If you have MCAs, stop adding new ones. Prepare a structured cure (collateralized refinance, term-out, or cash flow plan) before applying.

Credit Profile & Public Records

Owner credit: FICO trends, utilization, recent inquiries, derogatories.
Business credit: Pay history with vendors, UCC filings, liens, judgments.
Compliance: Active entity, good standing, licenses, insurance in place.

Credit doesn’t need to be perfect—just explainable, improving, and consistent with your cash story.

Industry Benchmarks & Seasonality

Underwriters compare your ratios and margins to industry peers. If you’re seasonal, show the pattern and the cushion to bridge troughs.

Provide 24 months of monthly P&Ls to visualize cycles.
Explain margin dips (fuel spikes, supplier changes, labor step-ups).
Show inventory turns and AR discipline against your sector norms.

Projections, Use of Funds & Your Narrative

Use of funds: Tie dollars to drivers (e.g., “$150k CNC increases capacity 22%, payback 14 months”).
Assumptions: Volume, pricing, staffing, COGS, ramp time—be conservative and sourced.
Sensitivity: Show downside case and how you still cover debt service ≥ 1.20x.

The best story is a reconciled spreadsheet plus a one-page memo that connects funding to measurable outcomes.

Your Lender-Ready Packet (One PDF Folder)

Owner IDs, entity docs, insurance certs.
Last 2 years business tax returns + YTD financials (BS/IS/CF) and prior Y/E comps.
12–24 months bank statements (all operating accounts).
AR/AP aging, inventory listing, key contracts or POs.
Debt schedule (rates, maturities) and any MCA details with exit plan.
Use-of-funds sheet and 12-month projections (base & downside).

Worked DSCR Example (Simple)

EBITDA (normalized)	$360,000
Total Annual Debt Service (existing)	$180,000
New Loan Proposed (annual payment)	$72,000
Pro-Forma Debt Service	$252,000
DSCR	`360,000 / 252,000 = 1.43x`

At 1.43x, this clears many underwriting bars (≥ 1.20–1.35x). If your number drops below 1.20x, reduce loan size, extend term, or increase EBITDA (price, mix, cost control) before applying.

Common Red Flags (Fix These First)

Multiple MCAs with daily/weekly drafts and no exit path.
Unreconciled financials or big deltas vs tax returns.
Choppy deposits, frequent NSFs, unpaid taxes, or payroll issues.
Unclear use of funds or projections that don’t tie to reality.

14-Day Action Plan to Get Loan-Ready

Days 1–7

Export last 24 months bank statements; calculate average daily balance & NSFs.
Close books through last month; reconcile BS to tax year-end.
Build debt schedule; identify any MCA and prepare cure/exit notes.
Draft use-of-funds with ROI math; prepare base & downside projections.

Days 8–14

Compute ratios (current, quick, DSCR, leverage) and write brief commentary.
Assemble packet PDF; label every file clearly.
Spot fix: cut non-essential spend; accelerate AR collections.
Schedule a lender-style review before submitting anywhere.

Next Steps & Helpful Resources

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What Lenders Look at Before Approving