Bank statements are a great source important financial information, when assessing a loan applicant’s eligibility for a business loan.
A loan applicant’s bank statement gives a periodic record of all the transactions undertaken by the applicant like deposits, withdrawals, cash transfers, debit card payments, interest earned, bank service fees, as well as the other instalments being paid. By analysing the frequency of these transactions, you can easily arrive upon the applicant’s ability to repay the loan on time!
What You Should Look For When Analysing A Loan Applicant’s Bank Statements?
As a prospective lender, ask for a copy of the applicant’s bank statement from the last 3-6 months.
1. Access Cash Balance on the Applicant’s Bank Statement
The positive cash balance in the bank account statement indicates that the borrower has some amount of money available with them. It also showcases how well the cash flow is managed by the applicant business. It is easy to count a borrower as a ‘responsible’ one when he maintains a positive cash balance through months, as it increases the chances that he would repay the loan in the future. Negative cash balances on the bank statement reflect mismanagement of finances by the applicant and place them in a negative light.
If you are wondering what should be the ideal amount of cash balance that a borrower must maintain in their bank accounts, it is important to note that it depends on the loan amount they have applied for. As a rule of thumb, the bigger the loan application amount, the higher the balance they must maintain.
2. Analyse Deposits on the Bank Statement of the Loan Applicant
When you look at a loan applicant’s bank statement, always mark down regular deposit sources. They signify steady sources of an applicant’s income. Great deposits in a business’s bank statements indicate profitable operations and consistent revenue streams from business transactions. Consistent steady deposits into the bank account of a loan applicant increase the chances that they will make on-time monthly repayments of the loan when issued.
However, one big red flag is when the last deposit is made months ago. This shows unsustainability in income sources and deficient chances of loan repayments. Lenders also need to be suspicious about irregular large deposits and one or two big deposits right before the time of loan application. Ask for an explanation about the origin of these funds and demand justifications, in such cases.
3. Examine Withdrawals and Liabilities on the Bank Statement
Any hefty withdrawals made from the bank account before loan application need to be a red flag for a lender. On the other hand, frequent withdrawals of similar amount from a bank account can be indicative of some undisclosed loan, credit card debt or a recurring expense that need to be paid regularly. Business liabilities are also deducted from the average monthly profit to derive a final number. Liability can be any recurring cost that has to be borne every month. Business liabilities like office rental, hire purchase, vehicle loans, etc show clearly in the bank statements of the business entity.
Enquire with the borrower about any liabilities which are not observed in the presented bank statements, ensure that they are declared for proper credit assessment. A loan applicant with regular withdrawals and liability payments amounting to figures that are less than regular deposits are fit recipients for a load, as they are capable of paying it back.
4. Scrutinise Cash Overdrafts on the Bank Statement
Using a bank’s cash overdraft facility allows a borrower to withdraw money more than their account holds at a given moment. Applicants can write cheques for funds that are not available in their account and that is when cash overdraft applies. Lenders need to beware of such overdrafts on an applicant’s bank statement. It usually indicates that an applicant struggles to manage his finances and is likely to face difficulty in repaying the loan. Ask the applicant to explain the reason for the overdraft and provide any supporting documentation, if possible.
It is true that different lenders will have different guidelines passed down to their loan application analyst. Also, the bank statement of a loan applicant is only one of the many factors that lenders access during a loan application assessment, but it is a concise picture of a borrower’s financial standing. Bank statements not only show an applicant’s financial position but also reflect their spending habits and cash flow management practice. Applicants with a clean bank statement including a positive cash balance, regular deposits and no overdraft several months before the loan application deserve loan approval.
Precisa is a tool that conducts automated analysis of an applicant’s financial transactions that are highly accurate. The aim remains to uncover underlying decisions, reaching a practical index that drastically reduces the case of NPAs and bad credit.
Well-equipped with Bank Statement Analysis(BSA) functionalities, the software showcases insightful topical domain understanding from the perspective of a credit evaluation for the lending decision. It boasts of being able to understand and analyse formats from more than 400 banks across the country.
The system has a keen understanding of the transactions and the data on a unit basis. It also creates easy-to-decipher visualisations and pertinent reports that come to the rescue of the credit evaluation team of the lending company. It is just the technology that a lender needs to understand and analyse the potential borrower for a potential loan. To safeguard a lender’s interest, Finezza allows fintechs to detect fraudulent statements, circular transactions, irregular patterns, transactions, and other such discrepancies.
To know more about how Finezza can help you optimise the lending lifecycle, get in touch with us!