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What Is The Role Of The Balance Sheet In Getting A Business Loan?

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Dec 18, 2022
Role Of The Balance Sheet

For your business, it is crucial to maintain books of accounts to track company activities and operational forecasting. From the viewpoint of your company’s shareholders and investors, the Balance Sheet acts as a report of your company’s financial status and line of credit. It helps evaluate your business needs internally, which can be any financial updates, additional assets, operating costs, salaries, etc.

Banks regularly ask for the company’s balance sheet to monitor its growth over time and update the Business’ Credit Score. They do this in case the company approaches the bank to apply for a business loan.

What is a Balance Sheet?

A balance sheet is one of the primary elements of a company’s books of accounts. It is a financial statement that gives an overview of the company’s financial records and helps further operational evaluations. It generally consists of all types of machinery, assets, stocks, profits, and loss value of your company for a fiscal year. You can use it to estimate the business’s net worth and gain an overview of your company’s performance.

Moreover, a business balance sheet acts as a forecasting tool. It allows the business to make specific improvements or maintain balance to prolong operations; without falling into much trouble.

Elements of a Balance Sheet

A Balance Sheet consists of multiple financial instruments, further divided into two columns – Assets & Liabilities.

  • Assets

An asset is a profitable business resource that a company can use for production, revenue generation, etc., or can be directly liquidated to obtain cash. Company assets add value to the business in financial statements and can generate significant cash inflows and decrease cash outflows. 

Assets are divided into four types – Fixed Assets, Current Assets, Intangible Assets, and Financial Investments. 

  • Liabilities

Liabilities are legal obligations and risk instruments, quite the opposite of business assets. Liabilities can be anything from lenders, borrowed sums of money, loans, recurring expenses, and accounts payable. It might be a large sum (often reaching and leveling the value of assets) and usually is repaid over time with increased business income and profits. 

A Balance Sheet report also consists of shareholder’s equity, representing a company’s net worth. It is used to determine a company’s overall financial health. The net value of the Shareholder’s Equity can be determined by subtracting the Total Liabilities Value from the Total Assets Value. 

Benefits of Using a Balance Sheet to Get a Business Loan

A Balance Sheet is crucial in providing advanced steps to meet your business requirements beforehand. It is beneficial for growth and improvises overall financial health.

  • It Evaluates the Business Record

If a business has a decent growing financial record, where the assets have more value than the liabilities, it improvises the overview. Such a balanced record is helpful for investors and financial institutions as they can provide the required business loan without any uncertain terms. 

  • Insights into Financial Ratios 

For small businesses, a Balance Sheet can provide insights into financial ratios, which can help determine the business’s health. Certain aspects such as Liquidity, Profitability, Productivity, and Solvency Ratios play a crucial role in the growth of a small business. It can help estimate the business’s stability and sustainability in the long run.

  • Maintaining Business Priorities 

A balance sheet helps a business list the priorities that are mandatory to sustain. It gives a complete insight into the assets that generate the most revenue and which liabilities are essential to write off. The primary assets should generate healthy revenue to obtain a business loan. Plus, the liabilities should be putting on only a few financial obligations. 

How to Prepare a Balance Sheet for your Business?

You can follow these steps to prepare a Balance Sheet for the Company in the most accurate way.

  • Trial balance 

A trial balance is a mathematical financial statement comprising all the business’ debits and credits. It is a two-column table that records all company transactions in a given period. This statement is prepared to rectify the double-entry accounting errors that are mathematically incorrect and affect the balance between the total credits and the total debits. 

  • Arranging and finalizing trial balance

After recording all initial expenses in the business, it is time to eliminate what’s unnecessary to include in the balance sheet. This can be anything apart from the business assets, liabilities, and equities — for example, expenses, gains, losses, etc. 

  • Adding up for the final value 

The finalized trial balance has all the elements required to prepare an accurate Balance Sheet. It consists of several accounts that need to be added, including Cash, Fixed Assets, Stocks, Inventory, Accounts Receivables, Accounts Payables, Liabilities, Debts, Miscellaneous Liabilities, Assets, etc. 

  • Validation

After adding up the accounts in the appropriate column, the result must be in specific criteria. It is required to know the accuracy of the company’s financial records, and the total asset value should match the total liabilities value and equities.  

  • Formatting the Final Statement

After everything is finalized, format the whole statement in the required format. A Balance Sheet format consists of a table with two columns – one for assets and the other for liabilities.

Conclusion

Balance sheets, along with other financial statements, are the upfront displays of your financial standing. Cash Flow Statements, Income Statements, and a maintained balance sheet act as financial instruments to portray your business’s health. They are also helpful in making priority moves, improved efficiency, better management, and changes to sustain a business’s lifespan.

To avail of a business loan for your company, it is necessary to meet the requirements of optimized and well-maintained financial documents. 

Thus, it becomes necessary to develop and maintain your business’s balance sheet and other financial instruments to maintain operational and financial stability, which will boost your business’s growth.

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