Your budgets and forecasts are important to the lender as these show how your business will operate during the period of the loan. It’s important to know how to prepare these forecasts in line with your lender’s expectations. You may need your accountant’s help with this.
By preparing both a cash flow forecast and profit and loss budget, you will have sufficient information to prepare a balance sheet budget. Remember to prepare the forecasts as if the loan has been approved.
Your financial forecasts should include the following:
As you are preparing your estimates on income and expenditure, you will be making assumption on how your business will operate in the future.
It’s best to use realistic targets that you believe are achievable. A good place to start is to look for any trends in your historic financial information.
Any industry information provided by independent reputable companies will also give your assumptions credibility.
One of the most important pieces of information for the lender is a cash flow forecast that provides the necessary detail on the cash available to pay back the loan.
A profit and loss budget shows the potential lender whether the new business plan is profitable.
The balance sheet provides a picture of the financial health of a business at a given moment in time (usually the end of a month or financial year).
It lists in detail the various assets the business owns, the liabilities owed by the business and the value of the shareholders’ equity (or net worth of the business).
A budgeted balance sheet provides the lender with information on the expected net worth of the business after the loan has been drawn.
The lender will review this information to ensure your business has sufficient equity / net worth and they will be looking for an increase in the net worth of the business over the term of the loan.
Potential lenders use financial ratio analysis to evaluate the current and potential performance of your business.
The most common ratios are:
- Liquidity ratios
- Return on assets and investment
Every lender will carry out some analysis on the financial forecasts you have provided. It’s important that you include your own sensitivity analysis to show that you are aware of the impact to the financial position of the business when unforeseen events occur during the term of the loan.
Historical business financial statements
For existing businesses, the lender will want to review historical financial information including your balance sheet, profit and loss statement and cash flow statements.
Typically, the lender will want business records going back three or more years.
Ideally, this information should be either prepared and or reviewed by an accountant. This offers an assurance that the information is accurate and complete.
- A balance sheet
- Profit and loss statement
- Cash flow statements
- Previous BAS statements (usually for the last four returns)
- Annual tax returns, including the assessment notices received from the ATO
- Current accounts receivable and payable schedules (debtors and creditors lists)
- Bank statements for all bank accounts and loans for the past three years
- Details of any current or previous bank or other loans including all loan agreements and statements
- Details of any other types of financings such as leasing or hire purchase
- Previous bank relationships
- Key customer relationships
- A copy of your Tax Office portal page showing any current payment obligations with the ATO
In addition to the financial statements, the lender will most likely also want to check the historical operating data of your business to get an idea of the way your business is managed and get some insight into the character of the owner/s.