How Important Are Financial Accounts To Your Bank?

We come across many businesses who are hurrying to get financial accounts, management accounts, cash flows or profit & loss accounts completed so they can present them to their bank.

There is a common misconception that a bank looks at financial accounts when assessing lending.

The answer is that they do, but they are not the first thing on the list.

This misconception means that many businesses fall at the very first hurdle, all their accounting costs, time and efforts can be for no benefit. The downside here is that not only does the business not achieve its borrowing aims but the relationship between banker and client is permanently damaged.

What Does a Banker Look At First?

In essence the first 4 areas the bank will look at are –

1. Internal Records
2. Visits & Interviews
3. Audited Financial Accounts
4. Management Accounts

The priority here has to be to look at number 1 first, after all if you do not then you will not even reach number 2.

The question is what does Internal Records mean?

To provide some insight we detail a range of items that fall within this sector. Taken individually each of the following is not necessarily a cause for concern, however where a number of them appear then it will be cause for further investigation.

Internal Records

1. Unauthorised excesses (balance over any agreed limit)
2. Recent, or regular increases in overdraft limit
3. Account turnover decreasing
4. Account turnover increasing
5. Hardcore balance (a constantly overdrawn account balance)
6. Unpaid cheques paid into your account
7. Unpaid cheques written by you
8. An increase in volume of status or reference enquiries received
9. County Court Judgements
10. More standing orders or direct debits to credit companies
11. Cash being taken out
12. Rumours

The majority of these are fairly obvious. However indicators like ‘increasing turnover’ may suggest drawdown of external borrowing, perhaps funding losses. Whilst ‘increase in volume of status enquiries’ could mean your trade creditors revising their opinion of you, normally in response to non, or late payment.

What Can I Do With This Information?

We suggest that whilst a business may be keen to get it’s financial records in order, it also needs to look at how it operates it’s bank accounts. If a business is considering taking out bank lending then make sure your account has been well operated for six months and on very good behaviour for at least three months.

The reason we suggest these timescales is that account opinion is always analysed in arrears, it is historic by nature, and bank systems take time to react. Therefore please consider this as a core element of your preparation for lending.

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