7 min read
Home Loans for Self-Employed: 2024 Guide for Self-Employed Individuals
Securing home loans for self-employed people can be challenging. Many reasons exist, from non-traditional work...
When businesses request loans, lenders need a way to ensure their financial stability before they grant the funds. Checking the company’s bank statements is one way to do so.
Loans that require such checks are called bank statement business loans.
According to the ACFE, 5% of global annual revenue is lost due to fraud. Checking these bank statements allows lenders to trust the company’s income and debt history.
In this guide, we’ll dive deep into every aspect of bank statement business loans: the different types, pros, cons, and processes.
A bank statement loan relies on the borrowers’ bank statement to assess their financial health. Traditionally, loans rely on tax returns, W-2s, or pay stubs.
This approach is helpful for freelancers, business owners, or the self-employed with high incomes. While their credit score may be great, they may not meet the requirements of traditional loans.
This type of loan usually has higher interest rates and down payments. That’s because lenders consider them riskier than most loans.
In a bank statement business loan, businesses can use their bank statements to showcase their income. To assess their cash flow, lenders will review these statements over specific periods – typically 3 to 6 months.
There are four types of business loans that may rely on bank statements.
Bank statement business loans are pretty beneficial for companies with high credit and income. Here are some of their pros.
Since these loans only need your bank statements for verification, the application and approval are pretty quick. Whether it’s 2 days or 3 months, bank statement business loan approvals are faster than traditional options.
Bank statement loans are good for businesses with incomes that are trickier to document through traditional methods. For instance, tourism-related businesses are seasonal, so their income patterns can vary greatly.
Bank statement loans can be provided to businesses with all kinds of income sources and financial health. That means they’re more likely to get approved than traditional loans, especially if you have limited documentation.
Bank statement business loans can be beneficial for many types of borrowers. Here are a few types of businesses that may benefit from such a loan.
Small businesses in their early stages don’t have the right financial documentation or history to qualify for a traditional loan. With a bank statement business loan, you get a viable financing option based on your cash flow.
Businesses with seasonal fluctuations in revenue find it hard to showcase a consistent cash flow to traditional lenders. They can use bank statement loans to leverage their cash flow in peak seasons to get more funds.
Startups don’t have the financial history or collateral required for traditional loans. With a bank statement loan, startups can get their hands on financing with the help of their cash flow instead of historical data.
Companies with less-than-perfect credit histories may struggle to qualify for traditional loans. Bank statement loans focus more on cash flow and less on credit scores, so they’re perfect for businesses with lower credit scores.
Here’s what the process of applying for a bank statement business plan can look like:
Creating a strong and compelling application is the key to getting quick approval for a bank statement. Here are a few tips to keep in mind.
First, make sure your business plan is robust. It should outline your company's mission, market analysis, products or services, target audience, marketing strategies, and financial projections. This will make your lender more confident in your creditworthiness.
Provide a history of consistent and healthy cash flow over at least 3 to 6 months. This will show the lender that you can repay the loan as expected.
Pay bills on time, resolve outstanding issues, and minimize debt to create a strong credit profile for your business. Sure, bank statement loans are more lenient on credit requirements, but good credit can still give you a leg up in the game.
If possible, offer collateral or personal guarantees to secure the loan. Collateral assures lenders they have assets to recoup their losses in case of default. This also showcases your commitment to repaying the loan.
Bank statement loans offer business owners a great deal of flexibility and accessibility, but they also have certain disadvantages. Let’s look at a few cons.
Bank statement loans have higher interest rates than traditional options. Lenders find these loans riskier because they rely on only your bank statements. So, they use interest rates to make up for potential losses.
Bank statement loans may have shorter repayment terms, so you may have to pay more monthly. This may impact your cash flow, especially if you have an irregular income.
For lenders, bank statement loans carry a higher risk of default. Businesses with unstable cash flow may not be able to meet their loan obligations, increasing the risk of default for both parties.
Now that you know the pros and cons of this type of loan, the question is how to find the right one. Here are some factors we recommend considering.
Once you’ve acquired the right bank statement loan for your business, your top priority should be repaying it as soon as possible. The last thing you want is for the interest rates to add up and impact your cash flow.
Here are some tips for managing and repaying such a loan.
Bank statement business loans are a smart way for companies to get funding by showing their financial statements. This way, they can put their high income to good use and avoid the strict eligibility requirements of traditional loans.
But before you invest in such a loan, you’ll need a professional to decode the fine print-contact us today to hire an expert financial advisor.
Oct 6, 2024by Jason Nichols
Securing home loans for self-employed people can be challenging. Many reasons exist, from non-traditional work...
Sep 27, 2024by Jason Nichols
Leveling up your real estate portfolio might require a few loans. However, it is one of the smartest ways to invest in...
Sep 15, 2024by Jason Nichols
For real estate investors in Ohio, understanding Debt Service Coverage Ratio (DSCR) loans is crucial. These loans,...