On a daily basis, I get customers who walk in and ask for loans. Naturally, I ask to look at the account statements as the bare minimum before determining viability of the application and advising whether to proceed, or forget. Different lenders check out for different things in statements presented. Again, different loan types call for different viewpoints in analysing bank statements.
The simplest lending model is associated with micro finance institutions. All a borrower is expected to do is belong to a group, make weekly savings and actively participate in meetings. The loan advanced is based on amount of savings multiplied by a predetermined factor. Mostly, it’s savings times three. A bank statement is therefore of no consequence to the lending decision.
The second basic lending decision is for check-off loans. All a bank verifies on the statements is that the salary shown on the pay slips presented is reflected in the salary account. This began after banks lost money borrowed against falsified pay slips.
More complex statement analysis is done for business borrowers. This is because loans are given based on business cash flows. A working assumption usually is that the average monthly deposits are equal to your monthly sales.
How is your statement analysed?
The first step is to find total deposits per month for the last six months. Seasonal businesses or those with erratic cash flows like building contractors are analyzed for the last 12 months.
The average monthly deposit figure is then calculated. Whichever figure is obtained then gives a guide of how much can be committed to loan repayments. A provision is usually made for business and family expenses and any other commitments evident. As a rule of thumb, no lender will advance a loan whose monthly installment is higher than your average monthly deposits.
The next step is to examine the highest and lowest balances in the account for the same period as above. For many borrowers, this is not a big deal. It just enables the lender to see whether you overdraw your account irregularly. Positions that are overdrawn need explaining.
Customers who have an overdraft facility with their bank may get a lot of questions at this stage. When an overdraft is granted, usually for a period of 1 year, it is expected that the account will not remain permanently overdrawn. It should ‘swing’ from credit to debit balances regularly. If this is not the case, the facility is regarded as non-performing. Extra caution is taken for subsequent borrowing.
On a general level, the statement gives the lender an idea of how much money is generated by the business and how stable the flow is.
Subtle information that comes through is how good you are at settling obligations. If you have issued cheques that have been dishonored due to lack of funds, a satisfactory explanation will be needed. Businessmen who always write cheques for amounts that are round figures to their suppliers are assumed to be making partial payments. Realistically, very few goods supplied amount to neat round figures all the time.