Before approving a loan, all lenders evaluate the borrower’s eligibility and risk tolerance. They carry out this assessment through underwriting, a vital research-based technique that aids lenders in determining the level of risk and safeguarding their interests. Verification of documents is one of many factors that affect underwriting.
Statements of the borrower’s personal and financial information are typically required documents that lenders request with a loan application. Lenders investigate the financial and unique history of the borrower before sanctioning any loan, whether it be for an individual or a business.
Depending on the type of loan, different documents are required by lenders. Regardless of the type of loan, bank statements are an essential document for loans. Lenders typically need bank statements from the previous six months to approve a loan. However, they might need statements from the prior year in some circumstances.
Here’s why having bank records is essential to obtaining a business loan:
Analyzing the Cash Balance Of The Applicant
Examining bank statements gives lenders a better idea of the cash available in a potential borrower’s bank account. A healthy cash balance shows that the borrower has enough cash to cover the down payment and monthly payments.
The monthly expenses and net savings are reflected in bank statements, which gives the banks a general idea of the applicant’s financial discipline. Banks determine whether the applicant is creditworthy based on this assessment. The loan amount is also influenced by the applicant’s monthly income credited to their bank account. The required balance rises with the size of the loan application.
Checking Cash Overdraft
Cash overdrafts indicate negative cash balances on bank statements. It occurs when borrowers take out more money at once from their accounts. Cash overdrafts can be a warning sign for bankers that the borrower may have trouble repaying the loan.
Prospective lenders review an applicant’s bank statements to determine whether the “sourced” cash deposits, which include direct deposits, check deposits, and online transfers that add to funds, are present in the applicant’s bank account.
Both sourcing and seasoning prevent money laundering and reassure the lender that the loan amount will not be used to make the down payment. Lenders also examine bank statements to determine whether the available cash balance is “seasoned,” which means that the funds have been in the account for some time and were not recently deposited there.
Evaluation of Liabilities
Lenders may frequently inquire about the specifics of these payments to determine if regular withdrawals are higher than traditional deposits. Standard business deductions to pay off utility bills, office rent, etc., may be reflected through bank statements. The recurring expense of an unusually large amount from a bank account due to some undisclosed loan or credit card debt also gets reflected as a withdrawal.
Liabilities must be evaluated to determine whether sufficient liquid funds cover the closing costs, ranging from 2% to 5% of the total loan amount.
Lenders require at least two bank statements to know about the applicant’s liabilities because any loan taken for more than two months appears on the previous credit report. Applicants must sign in to their bank account on the bank’s website to obtain copies of their bank statements for business loan applications.
In addition to tax return statements, business proof, profit-loss statements, and balance sheets, borrowers must provide lenders with their bank statements as proof of financial history because they provide insight into a loan applicant’s spending patterns and cash flow management techniques.
Loan applicants are considered irresponsible, and their loan applications may be rejected if there are even the slightest negative reflections in their bank statements, which are enough to cast them in a negative light. Knowing what documents lenders require to process a business loan simplifies the application process. It is made even easier when the loan is obtained from a reputable financial institution like Fintitude, which only requires a few basic documents, including address, age, and identity proof, along with some financial records.