What lenders may look at in your numbers

This lesson brings the course together. Every number you have met so far, from profit and cash flow to debtors and margins, is something a lender may look at when you apply for business finance. The aim here is to help you read your own numbers the way an outsider might, not to suggest you should borrow.

For the practical steps before applying, see how to prepare for a business finance application. For more on the assessment itself, read how lenders assess business loans.

Different lenders, different criteria

There is no single lending policy. Each lender sets its own credit criteria: what it asks for, how long you need to have been trading, which industries it will lend to, how much security it wants and how it works out whether you can afford repayments. A business one lender declines may suit another, and the reverse. Nothing in your numbers guarantees an approval.

What lenders may look at

Revenue

How much comes into the business, whether it is growing, steady or falling, and how seasonal it is. A lender may also ask whether a large share comes from one customer.

Cash flow and bank statements

business.gov.au suggests understanding your cash flow position before you apply, and says lenders may ask for financial reports, including cash flow statements if available, and financial forecasts. Many lenders also read business bank statements to see money coming in and going out, the lowest balances, overdrawn days, dishonoured payments and regular repayments to other lenders.

Profitability and financial statements

Your profit and loss statement and balance sheet show whether the business makes a profit, how steady its margins are, what it owns and what it owes. Some lenders ask for one or two years of financial statements and tax returns. Others rely more on bank statements and BAS.

BAS and tax position

The ATO describes a business activity statement (BAS) as a statement used to report your taxes, including GST and PAYG. Because BAS includes your GST reporting, some lenders use lodged BAS as a check on turnover. A lender may also ask whether your lodgements are up to date and whether you owe the ATO.

Existing liabilities and repayment history

What the business and its owners already owe, including loans, leases, credit cards, supplier accounts and tax debts, and whether those have been repaid on time.

Credit information

Lenders may check the credit reports of the business and its directors. Moneysmart says a personal credit report includes your repayment history, defaults, credit applications and the credit products you hold, and that lenders use this information to assess lending risk. Credit reporting bodies can hold different information, so your score may differ between them.

Security and equity

business.gov.au suggests working out what assets you can offer as collateral, if you need it. A lender may take security over business assets or property. It may also look at the owners’ equity in the business (assets minus liabilities on the balance sheet) and any equity in property. See what does LVR mean?

Time in business and industry

How long the business has been trading, its industry, and the experience of the people running it. Some lenders do not lend to certain industries at all.

The plan

business.gov.au says lenders usually want to see your business plan before they approve a loan. A clear purpose for the money and how it will be repaid helps a lender understand the request.

One common measure: debt service cover

Many lenders test whether the business earns enough to meet all its repayments, although each one calculates it its own way. One common form is:

• Debt service cover = earnings available for repayments / total yearly loan repayments

“Earnings available” is often net profit with interest, depreciation and some one-off items added back, but the definition varies by lender. A result of 1.0 means earnings would only just cover repayments. Lenders set their own minimum levels, and many look at other measures alongside this one.

Worked example

Southside Electrical is a fictional electrical contracting business in Brisbane that is thinking about buying two new vans. Its accountant helps the owner look at the numbers the way a lender might.

Item	Amount
Net profit before tax	$120,000
Add back interest on existing loans	$10,000
Add back depreciation	$20,000
Earnings available for repayments	$150,000
Existing yearly loan repayments	$40,000
Estimated yearly repayments on the new vans	$35,000
Total yearly repayments	$75,000

Debt service cover = $150,000 / $75,000 = 2.0 times. Earnings would cover the total repayments twice over, based on last year’s figures.

That figure alone does not decide anything. A lender may also notice that one builder makes up 40% of revenue, that debtor days have risen from 35 to 50, or that a BAS is overdue. Each of those could matter more to a particular lender than the ratio does. The owner may decide to lodge the overdue BAS and tighten collections first, or to delay the purchase.

What your numbers may say to a lender

• Steady or rising revenue and margins suggest the business can keep meeting commitments.
• Tight bank balances, overdrawn days or dishonours may raise questions about cash flow even when profit looks good.
• Rising debtor days or supplier arrears may point to cash pressure. See debtors and creditors.
• Overdue lodgements or tax debts may slow or stop an application until they are addressed.
• Existing repayments that already take a large share of earnings leave less room for more.

If you have been declined

business.gov.au suggests asking the lender for feedback and seeing what you can change for next time. Moneysmart suggests checking your credit report for errors and warns that each credit application is noted on your credit report, so many applications in a short time can lower your credit score. A decline from one lender reflects that lender’s criteria. It may also be a useful signal to look at the numbers in this course with your accountant before applying again.

When to get professional help

An accountant can prepare up-to-date financial statements, explain your results and help you judge whether new repayments are affordable. A bookkeeper can keep your BAS, bank reconciliations and aged reports current. A business finance broker or adviser can explain how different lenders’ criteria may apply to your situation.

Where finance fits

Finance may suit a business that is profitable, has a clear purpose for the money and can meet repayments from its cash flow. It does not fix a business that is losing money. If you are borrowing to cover a shortfall that keeps coming back, read when borrowing is not the answer first.

Important things to know

• No single number decides an application. Lenders look at the whole picture, and each weighs it differently.
• Criteria change. A lender’s policy can change over time, and what applied last year may not apply now.
• Your records matter. Current, accurate books make your numbers easier to explain.
• Be upfront. Explaining a known issue, such as a one-off loss or an ATO payment plan, is usually better than a lender finding it.
• Borrowing adds a fixed commitment. Repayments raise the sales you need just to cover your cash outgoings, so check what they do to your cash flow and margins first.