7 min read

How Bank Statements Can Secure Your Business Loan

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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. 

What is a Bank Statement Loans?

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. 

How Do Bank Statement Loans Work?

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

What Are the Four Types of Business Loans?

There are four types of business loans that may rely on bank statements.

  1. Term Loans: These loans are funded as a lump sum and can be repaid over a specific period with fixed or variable interest rates.
  2. Lines of Credit: Businesses can receive this loan as a line of credit and repay it as needed. 
  3. SBA Loans: Small Business Administration (SBA) loans are backed by the government and offered by banks. They have good terms and lower down payments.
  4. Business Credit Cards: These cards offer revolving credit lines for business expenses. They’re pretty flexible but may have higher interest rates.

Benefits of a Bank Statement Loan

Bank statement business loans are pretty beneficial for companies with high credit and income. Here are some of their pros.

1. Faster Application Process

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. 

2. Flexible Eligibility Requirements

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. 

3. Higher Approval Rates

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. 

Types of Businesses That Need Bank Statement Business Loans

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. 

1. Small Businesses

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.

2. Seasonal Businesses

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.

3. Startups

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.

4. Businesses with Poor Credit

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.

Applying for a Bank Statement Business Loan

Here’s what the process of applying for a bank statement business plan can look like:

  • First, you have to gather certain documentation for your bank statement business loan. That includes identification, business incorporation documents, profit and loss statements, and business tax returns. 
  • The lender will review at least 3 to 6 months' worth of your financial documentation. You’ll also need to tell the lender about your business structure, industry, revenue, and purpose for the loan. 
  • Once you've given your loan application, the lender will assess your creditworthiness. This process can be as quick as 2 days or take a few weeks. It all depends on the specific lender. 
  • If your request gets approved, the lender will give you a loan offer. This will specify the loan amount, interest rate, repayment terms, and any other conditions. Review the offer carefully and read the fine print before accepting.
  • Finally, you can sign the loan agreement and close the deal. Once the funds are disbursed, you can start making weekly or monthly payments based on the agreed-upon terms.

Tips for a Stronger Bank Statement Business Loan Application 

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.

1. Solid Business Plan

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.

2. History of Consistent Cash Flow

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.

3. Strong Credit Profile

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.

4. Collateral or Personal Guarantees

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.

Drawbacks of a Bank Statement Business 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. 

1. Higher Interest Rates

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.

2. Shorter Repayment Terms

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.

3. Risk of Default

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.

How to Find the Right Bank Statement Business Loan

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. 

  • Interest Rates and Fees: The lender’s interest rates and origination fees should be the first thing you factor in. You may not find the cheapest options, but comparing your options may make them easier to afford.
  • Loan Terms and Repayment: Read the fine print of each lender's loan terms. That includes the repayment terms and how frequently you’ll be paying. 
  • Loan Amounts: Determine the amount of funding your business needs and find a lender that meets your requirements. As a good rule of thumb, your average requirement should be the lender’s minimum limit.

Managing and Repaying a Bank Statement Business Loan

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. 

  • First, create a repayment plan. It should outline how you’ll repay the loan, how much you’ll pay every time, how often you’ll send the payments, etc. 
  • Repaying the loan should be the top priority in your company’s budget. Allocate a specific amount every month to ensure repayments are made on time and in full every time.
  • If possible, set up automatic loan payments to ensure each increment is made on time. This will help you avoid late fees and maintain a good credit score.

Conclusion

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.

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