Accounting reports that a bank may ask before giving you that business loan
It is important to note that all accounting documents need to be certified by a CA and audited proof of continuation of will need to be submitted.
Before you apply for a bank loan, it is important to know the documents that would be needed to get a business loan. Banks have a long list of documents that they need, especially if you are borrowing for the first time or do not have an existing relationship with the bank.
Documents range from Pan card to the address proof of the owners and the business itself. However, banks need some crucial accounting reports to arrive at a decision.
These would include:
Although not an accounting document, banks would want statements for the previous 6 months. It is, therefore, elementary that you should never have your personal and business account as the same. Small businesses run by a sole proprietor may sometimes make that mistake, especially when they are very small. In fact there is an increasing trend by financial institutions in insisting the borrower to take the route of private limited company for incorporation before they lend money.
Banks generally ask for the latest Income Tax Return (ITR), but may sometimes ask for the previous 2-3 years also to get a better sense of your business. The ITR needs to clearly show the computation of income to arrive at the amount of tax being paid. Computation of income is done after various expenditures incurred in the line of business are deducted. Expenses can include rent of building, depreciation on fixed assets, employee salaries, and communication expenses amongst others. Even interest paid on certain business loans can be deducted, but personal expenses cannot be clubbed here.
The Balance Sheet of a company is an important document that provides a snapshot of the business by providing information on the assets, liabilities and capital/equity invested by shareholders. For a bank, the balance sheet provides a good picture on the financial stability of the business and how well its shareholders capital, liabilities and debt have been utilized to create something of value. Banks may ask for balance sheet of more than one year to get a better picture about the growth of the company. It is important to note the balance sheet for a company that is in the services business will be the same as that, for example in manufacturing, since your total assets in the end has to balance out the amount in liabilities and capital from shareholders.
Profit & loss account
As the name suggest, profit and loss account shows if revenue earned by the company has been greater or less than the expenses incurred to run the business. P&L account is a key accounting document that has to be detailed about how and where revenue came from, while also list out where money has been spent. A profit means the health of a business is good, while losses can be viewed negatively by a bank. Banks generally ask for at least previous two years of P&L account to get a better picture of the business.
It is important to note that all accounting documents need to be certified by a CA and audited proof of continuation of business (which includes your ITR/Trade license/Establishment Certificate amongst other) will need to be submitted. Other mandatory documents that are not accounting in nature, but need to be submitted include sole proprietor declaration or certified copy of Partnership Deed, certified copy of Memorandum & Articles of Association (certified by director) & board resolution.
(The writer is the CEO, Wishfin.com)