What Are the Types of Financial Statements, and Why Does My Bank Need One?

Are you thinking about applying for a business loan? Before granting approval, lenders typically require you to submit a balance sheet, income statement, and cash flow statement. These financial statements not only give lenders insight into your financial health but also demonstrate your ability to repay the loan. Understanding these documents can help boost your chances of being approved, so let’s dive deeper into each statement and explore how to use them to strengthen your loan application.

The 3 Primary Types of Financial Statements

When a bank reviews your loan application, they are essentially trying to answer one question: Will this business owner pay us back? To find out, lenders typically request three documents: balance sheets, income statements, and cash flow statements.

Balance Sheets

These documents tell banks:

• What you own (your assets)
• What you owe (your liabilities)
• What your stake in the business is (your equity)

When banks review your balance sheet, they are essentially assessing your:

• Financial stability: Banks want to know that you have enough cash or convertible assets to handle your financial obligations.
• Assets-to-liabilities ratio: Lenders prefer borrowers who own more than they owe.
• Risk level: Banks assess your current debt levels and ability to take on additional debt without overburdening the business.

Income Statements

An income statement gives lenders an overview of your company’s financial performance over a specific period of time. This document also details the expenses you incurred to earn that revenue, including:

• Revenue
• Gross profit
• Direct expenses (costs of labor and materials)
• Indirect expenses (salaries, rent, utilities, etc.)
• Capital expenses (interest, taxes, etc.)

When reviewing your income statement, lenders are trying to determine the stability of your income—if you are making income and whether that income is stable, growing, or declining.

Cash Flow Statements

Another type of financial statement lenders will request is a cash flow statement. This document shows a record of all incoming and outgoing cash. This type of financial statement typically includes a record of all:

• Operating activities: How much cash you generated from customers and how much you paid out to vendors, employees, tax authorities, and creditors.
• Investing activities: Cash flow related to long-term business investments like new equipment or property.
• Financing activities: Any other business loans you took out or paid off.

The Importance of Maintaining Financial Statements

Maintaining accurate and up-to-date financial statements is essential to securing a business loan. But doing so can also help you make informed decisions about your business. Without current financial data, you're operating on instinct—which isn't a business strategy.

Maintaining financial statements also alleviates tax-season stress. How? Staying current means you avoid the last-minute scramble to gather information at tax time. This proactive approach doesn’t just save you time; it also alleviates stress and reduces the risk of errors and overlooked deductions.

Staying current on your financial statements also ensures you maintain compliance and helps you spot errors early—before they spiral out of control. By reviewing financial statements, you may also be able to identify trends, allowing you to capitalize on business opportunities.

Our Mission: Give You 100% Financial Clarity

When you own a business, you need 360-degree accounting solutions that consider your financial situation as a whole. Unlike traditional accounting firms, we offer comprehensive assistance. From tax services to financial statement management, accounting, payroll, and more, we are here to support every aspect of your business's financial health. Contact us to book a discovery call today!