Bank statements come first, not tax returns
Owners are frequently surprised by this. In most short and medium-term commercial facilities, the first document opened is six months of business bank statements, and it carries more weight than any other single item in the file.
Tax returns are historic, prepared to minimise taxable income, and typically nine to twenty-one months out of date by the time an underwriter sees them. Bank statements are current, unmanipulated and show behaviour rather than presentation. A credit desk reads four things in them:
- Average daily balance. Not the closing balance on the last page — the average across the month. It shows the cushion the business genuinely operates with.
- Negative days. Days ending below zero, and NSF or overdraft fees. Three or four across six months is normal for a seasonal business. Eight in one month reads as a business already funding itself with an overdraft.
- Deposit consistency. The number and rhythm of deposits, not just the total. Sixty deposits a month across many customers is a far stronger revenue profile than two large ones, even at identical totals.
- Existing debt service. Regular outgoing debits that look like other facilities. This is how undisclosed advances get found, and they always get found.
The fastest way to fail commercial underwriting is to omit an existing advance. The statements show the daily debits. Disclosed debt is a structuring question; concealed debt is a character question.
The rest of the file, and what each part is for
| Document | The question it answers |
|---|---|
| 6 months bank statements | Can this business absorb the payment in a bad month? |
| A/R ageing | Who owes you, how concentrated, how slow are they really paying? |
| A/P ageing | Are you funding yourself by stretching suppliers? |
| P&L and balance sheet | Is there margin under the revenue, and what is the leverage? |
| Business tax returns | Does the reported picture reconcile with the bank activity? |
| Entity documents | Does this legal entity exist, in good standing, with these owners? |
| Ownership schedule | Who signs, and who guarantees, at 20% and above? |
| Debt schedule | What is already committed against the same cash flow? |
| Voided cheque / bank letter | Where funds go, and confirmation the account is yours. |
| Use of funds | Does the purpose match the instrument being requested? |
The five ratios behind the reading
Underwriters differ in style, but the arithmetic converges on a small number of measures.
Debt service coverage
Cash available to service debt, divided by the debt payments due. Below 1.0 the business cannot cover its obligations from operations. Commercial desks generally want meaningful headroom above 1.0 — the exact threshold is a matter of policy and sector, and no honest broker will promise you a number.
Time in business
Survivorship is genuinely predictive. Six months is the common floor for short-term facilities, two years for most bank-style term paper. There is little to be done about this except wait, or bring collateral or a guarantee that offsets it.
Customer concentration
If one customer is a large share of revenue, that customer’s credit becomes your credit. It is not automatically disqualifying — a single blue-chip customer on a multi-year contract can be a strength — but it will be examined and it will affect advance rates on any receivables facility.
Personal credit of the guarantor
For most facilities under a few hundred thousand dollars, principals sign personally, and personal credit is pulled. It matters less than owners fear and more than they would like: typically as a threshold to clear rather than a score that sets the price.
Sector and industry code
Every funder maintains a restricted list. Some sectors are excluded outright, others are capped. This is policy, not judgement about your business, and the fastest way to waste two weeks is to submit into a funder whose policy excludes your code. Knowing the panel is most of what an introduction is worth.
Errors that sink otherwise good files
- Incomplete statement pages. Sending pages 1, 3 and 5 of a six-page statement reads as concealment even when it is a scanner problem. Send every page, including the blank ones.
- Mismatched entity name. The application says one thing, the bank account another, the state registry a third. Fix the naming before you submit.
- Undisclosed positions. Covered above. It is the single most common reason a file that would have been approved is declined.
- “General working capital” as the use of funds. The least persuasive phrase available. Say what it buys and when it repays.
- Shopping the file everywhere at once. Multiple simultaneous submissions show up in shared industry data and in credit inquiries. It marks a business as distressed and reliably produces worse terms.
- Stale documents. A ninety-day-old ageing report is worthless. Refresh before submission, not after the request.
One number to prepare. Before any credit conversation, know your average daily balance for each of the last six months. If you cannot state it from memory, you do not yet know what a funder already knows about your business — and it is the number the whole file turns on.
What happens after submission
A file goes to a credit analyst, who verifies the entity, runs the debtors and the guarantors, reconciles the statements against the reported financials and builds a recommendation. Questions come back in one or two rounds. Answer them the same day — files decay in the queue, and a slow response is read as a signal in itself.
An approval usually arrives as a term sheet, not a contract: amount, term, payment, security, conditions precedent. Conditions precedent are the things that must be true before funds move — a lien release, an insurance certificate, a landlord waiver, an updated ageing. Clear them promptly, because term sheets expire.
If you are still deciding what to ask for, start with working capital versus a term loan or equipment finance. When the file is ready, send it to the desk and we will tell you honestly whether it is ready to place.