What role does the annual financial statement play in bank lending?
November 13, 2023 | 50,00 EUR | answered by Alice Heck
Dear Tax Advisor,
My name is Zofia Richter and I am the managing director of a small IT GmbH. In recent years, we have successfully built and expanded our company. Now we are facing the challenge of further advancing our growth and require financing from a bank.
My question relates to the role of the annual financial statements in the bank's decision-making process regarding loan approval. I have heard that banks use a company's annual financial statements as an important basis for their decision on lending. However, I am unsure of how exactly the annual financial statements are evaluated and which key ratios are particularly relevant.
Our current annual financial statements show a solid turnover and positive development, but I am concerned about the fluctuations in profits over the past years. I wonder if these fluctuations could be an obstacle to obtaining a loan and how we can optimize our annual financial statements to improve our chances of securing financing.
Could you explain to me which key ratios and aspects of an annual financial statement are particularly important for banks, and how we can potentially optimize our annual financial statements to increase our chances of successful loan approval?
Thank you in advance for your support and advice.
Sincerely,
Zofia Richter
Dear Mrs. Richter,
Thank you for your inquiry regarding the role of the annual financial statements in bank lending. It is indeed correct that banks use the annual financial statements of a company as an important basis for their decision on granting loans. The annual financial statements provide banks with an overview of the financial situation of the company and help them assess the risk of granting a loan.
An important aspect that banks consider when evaluating annual financial statements are the key financial ratios that provide information on the financial stability and profitability of the company. These include factors such as revenue and profit development, equity ratio, liquidity, and the company's level of indebtedness.
In your case, you mentioned that your company has solid revenue and a positive development, but struggles with fluctuations in profits. These fluctuations could indeed be a hindrance to obtaining a loan, as banks prefer sustainable and stable profits.
To optimize your annual financial statements and improve your chances of obtaining financing, you could try to stabilize and increase profits in the long term. This can be achieved through improved cost control, targeted revenue growth, or diversifying business areas.
Furthermore, it would be advisable to increase the equity share in your company, as banks consider companies with a high equity share as less risky. This can be done through equity fundraising or debt repayment.
Additionally, you can improve your company's liquidity by optimizing payment terms with suppliers or making the accounts receivable management process more efficient.
Overall, it is important that you present a transparent and meaningful annual financial statement that provides banks with a comprehensive insight into the financial situation of your company. If you have any further questions or require more detailed advice, I am at your disposal.
Best regards,
Alice Heck
Tax consultant
