What Do Business Lenders Look for in Bank Statements?

When you apply for a business loan, you may be asked to provide recent business bank statements or connect your account using open banking.

For many lenders, this is one of the most important parts of assessing an application.

Annual accounts tell a lender how a business performed historically. Bank transactions can provide a much more current picture of how much money is coming into the business, how it manages its cash and what financial commitments it is already servicing.

So what exactly are business lenders looking for when they review your bank account?

Why do lenders ask for business bank statements?

The main reason is to understand the company's recent cash flow.

A set of accounts could relate to a financial year that ended many months ago. Since then, the business could have grown significantly, experienced a downturn or taken on additional borrowing.

Bank statements help a lender understand what is happening now.

Depending on the lender, they may be used to assess:

• monthly revenue;

• cash balances;

• existing loan repayments;

• overdraft usage;

• returned or unpaid payments;

• payments to HMRC;

• major suppliers and customers;

• unusual transactions; and

• whether the company's financial position appears to be improving or deteriorating.

No single transaction necessarily determines the outcome. Lenders are generally interested in the overall pattern.

How much money is coming into the account?

One of the first things a lender may assess is the value of credits entering the business account.

This helps establish the company's current level of turnover.

If a business states that it generates £100,000 of monthly revenue but its bank account is receiving substantially less than that, the lender may want to understand why.

Conversely, bank credits may demonstrate that a company has grown significantly since its most recent accounts were filed.

Lenders may look at several months rather than a single month because revenue can fluctuate.

For seasonal businesses in particular, understanding those fluctuations can be important.

Do lenders care about the bank balance?

Yes, but the balance on any single day isn't necessarily particularly meaningful.

A company could have £100,000 in its account today because a large customer paid yesterday, while regularly operating with very little cash during the rest of the month.

A lender is more likely to consider the pattern of balances over time.

For example:

• Does the company maintain a reasonable cash buffer?

• Does the balance regularly fall close to zero?

• Is the business consistently overdrawn?

• Are balances improving or deteriorating?

• Does the company experience predictable periods of cash-flow pressure?

A business doesn't necessarily need to maintain a large cash balance to obtain finance, but consistently limited liquidity can affect how much additional debt it can comfortably support.

Is using an overdraft a problem?

Not necessarily.

An overdraft is a legitimate working-capital tool and many well-run businesses use one.

What may be more important is how the facility is being used.

A business that occasionally draws on an overdraft to manage normal working-capital fluctuations presents a different picture from one that remains at or close to its limit throughout the month.

A lender may also look at whether the overdraft balance is increasing over time or whether the business regularly returns to credit.

Persistent reliance on an overdraft can indicate that the company has less financial headroom available to support another loan repayment.

Do returned Direct Debits affect a business loan application?

They can.

Returned Direct Debits or other unpaid items can indicate that the business didn't have sufficient funds available when a payment was due.

However, context matters.

One isolated returned payment over several months of otherwise satisfactory bank conduct is different from repeated unpaid items every month.

A lender may consider:

• how frequently payments are being returned;

• the amounts involved;

• who the payments were due to;

• whether the account was subsequently funded; and

• whether the frequency of returned payments is increasing.

Repeated unpaid loan repayments or payments to important suppliers may naturally attract greater attention.

Do lenders look at existing business loans?

Yes.

Bank statements can help a lender identify the finance commitments the business is already servicing.

These might include:

• term loans;

• short-term business loans;

• merchant cash advances;

• asset finance;

• invoice finance charges; and

• other regular credit commitments.

This matters because existing repayments reduce the cash available to service new borrowing.

A company may have strong turnover but already be making substantial weekly or monthly finance payments.

The lender therefore needs to consider the proposed loan alongside the company's existing commitments rather than in isolation.

What if I've recently taken out another business loan?

A recent loan isn't necessarily a problem, but lenders are likely to take it into account.

If a company has taken several new loans in a short period, a lender may want to understand why.

Rapidly increasing borrowing can sometimes indicate that a business is using new finance to meet existing commitments rather than funding a specific commercial requirement.

This is sometimes referred to as loan stacking.

The existence of multiple facilities isn't automatically negative. What matters is whether the total level of borrowing and the combined repayments remain sustainable.

Do lenders look at payments to HMRC?

They may.

Regular payments to HMRC can help a lender understand how the business is managing its tax obligations.

If payments appear to have stopped, become irregular or are being made under a payment arrangement, the lender may ask for further information.

Having an HMRC payment plan doesn't necessarily prevent a business from obtaining finance.

The lender is more likely to want to understand the size of the liability, the agreed repayment arrangement and whether the business is keeping to it.

Do lenders look at who my customers are?

Bank transactions can sometimes provide useful information about where revenue is coming from.

A lender may notice that a large proportion of receipts come from one customer.

This is known as customer concentration.

For example, a company receiving 70% of its revenue from one customer may be more exposed if that customer leaves or reduces its spending than a company with a diversified customer base.

Concentration isn't necessarily a reason to decline an application. The lender may simply want to understand the relationship, how long it has existed and whether there are contracts supporting the revenue.

What about transfers between my own accounts?

Transfers aren't normally the same as trading revenue.

If £50,000 is transferred between two accounts belonging to the same company, it hasn't generated £50,000 of additional sales.

Lenders reviewing bank transactions may therefore distinguish between genuine customer receipts and internal transfers.

This is particularly relevant where a business operates several bank accounts.

Providing access to the main accounts used by the business can help give the lender a more complete picture.

Will unusual transactions cause a problem?

Not necessarily.

Businesses don't operate identically every month, so unusual transactions are inevitable.

A large one-off supplier payment, director contribution, tax payment or transfer may simply require explanation.

The important thing is that the explanation makes sense in the context of the business.

A lender is generally trying to understand the company's underlying financial position rather than penalise every unusual transaction.

How many months of bank statements do lenders need?

Requirements vary between lenders.

Many business lenders will want to review at least the most recent three months, while others may look at six months or longer.

A longer period can be particularly useful where the business is seasonal or recent trading has changed materially.

Open banking increasingly allows lenders to analyse transaction information electronically rather than requiring businesses to download and send individual PDF statements.

Can good bank conduct help a business loan application?

Yes.

Bank statements aren't only used to identify problems.

They can provide positive evidence about the financial strength of a business.

For example, a lender may take comfort from:

• consistent revenue;

• healthy cash balances;

• limited reliance on overdrafts;

• no returned payments;

• orderly servicing of existing debt;

• improving cash generation; and

• evidence of recent growth.

This can be particularly valuable where the company's latest filed accounts don't reflect its current performance.

What are the biggest warning signs lenders look for?

Every lender has different criteria, but some patterns are likely to attract additional scrutiny.

These can include frequent returned payments, continuously exhausted overdraft facilities, rapidly increasing borrowing, falling revenue, deteriorating cash balances and existing debt repayments that already consume a significant proportion of cash flow.

None of these necessarily means an application will be declined.

The lender will normally consider the severity of the issue, how recently it occurred and whether there is a reasonable explanation.

The direction of travel can be just as important as the absolute numbers.

A business recovering from a difficult period can present a very different lending proposition from one whose financial position continues to deteriorate.

What should I do before applying for a business loan?

You don't need to try to make your bank statements look artificially perfect.

Instead, make sure you understand anything a lender is likely to ask about.

If there have been returned payments, a significant fall in revenue, a new loan, an HMRC arrangement or an unusual transaction, be prepared to explain what happened.

Providing the context early can make an application easier to assess.

Applying for business finance with Adelpha Capital

Adelpha Capital provides business finance to established UK SMEs.

Bank conduct is one part of our assessment. We consider it alongside factors including turnover, trading history, existing borrowing, recent performance and the overall ability of the business to support the proposed repayments.

If you're looking for business finance, you can apply online or contact the Adelpha Capital team to discuss your requirements.