After the demonetization period, banks have received ample deposits which they are offering to peoples in the form of loans at reduced interest rates. And after the passage of lockdown period due to COVID-19, now peoples are approaching banks for loan purpose. If you want to take business loan from bank to expand your existing business or to start new business then banks are asking for many documents. In this article. we will discuss about “How to prepare Balance sheet of Bank loan” which banks usually ask in case of business loan.
Following documents are generally asked by banks for loan purpose (Proprietorship Business)
- Owners KYC (PAN Card, Aadhar Card, Voter ID Etc)
- 3 Years Income Tax Return
- Past 6 Months Bank Statement
- Last 6 Months GST Returns (If Applicable)
- Good CIBIL Score with healthy repayment track record
- Balance Sheet as well as Profit and Loss accounts for last 3 Years
- Projected Balance Sheet and Profit and Loss account for a period of 3 to 5 Years
- Collateral Security (depending on amount of loan)
- Project Report/ DPR
All documents are normally available with us except Balance Sheet and Profit/ Loss account and Project Report. In this article, we will learn how to prepare Balance Sheet and Profit & Loss Account. These documents must be prepared with adequate care, if documents are wrongly prepared then your loan application may be rejected by Bank. This rejection may impact your loan application in different bank also because rejection details are shown in your CIBIL Records.
The Balance Sheet and Profit/ Loss statement must be in correlation with your filed ITR and GST Records. If volume of transaction during the year is very high then it is suggested that, you must do accounting of all transactions before preparation of financial statements.
- Capital Contribution by owner: In this Part of Balance Sheet, we have to show the capital contributed by the owner (In case of Proprietorship Business). This amount shows the amount invested by owner as on a particular date, normally 31 March of closing year.
- Details of Secured/ Unsecured Loans: We have to show this amount in liability side of Balance Sheet. We should be very cautious about this amount because all loans taken by us are showing in our CIBIL records. If we have taken any loans from financial institutions and missed to show in our balance sheet and it is showing in our CIBIL records then it may lead to rejection of your loan file.
- Disclosure of amount dues to Creditors and receivable from Debtors: In case of each business segment, repayment schedule to creditors and receivables from debtors vary from industry to industry. While preparing Balance Sheet, we must show these particulars with adequate attention. Because many ratios are dependent on these financial figures.
- Disclosure of all known current liabilities as on specified date: While preparing Balance Sheet, we must show known liabilities like GST Payables, Electricity Charges dues on closing date to show exact position of financial statements.
- Fixed Assets details: We must provide actual details of fixed assets in our business. It helps banker to decide, how the banker can recover its dues in case of default. If we have good amount invested in Fixed assets supported with documents then it increases the chances of approval of our loan application. Further, it helps in increase the approval of higher loan amount.
- Details of Cash and Bank balances: In this part, we have to provide details of cash and bank balances available with us. This amount must be shown with care because it is major part in deciding Current ration of loan applicant.
Points to consider while Preparing Profit & Loss statement
- Disclosure of Sales Turnover and Closing Stock: While preparing Profit/ Loss statement these details must be disclose as actual supported with documentary proof.
- Disclosure of Expenses: In each industry, there are some specific expenses like in case of Shoe Industry charges of Soll, leather etc which must be disclosed in Profit/ Loss statement. That helps Banker to decide the working capital requirements of applicant business segment.
- Profit/ Loss Calculation: When we prepare Profit & Loss account then at the end it shows the Profit/ Loss earned by us during the year. This amount must be in correlation with Industry Profit ratio. Exceptional Profit/ Loss display will lead your application to rejection.
Essential points that must be present in our Balance Sheet and Profit & Loss account has been elaborated above. Many others points are there which must be given adequate attention while preparing financial statements but they are industry specific. Some other financial indicators may be asked by bankers according to the loan amount like Projected Financial Statements, Project Reports etc.
Above details are prepared for proprietorship business. Documents for loan approval and financial statements may vary in case of different business constitutions like Partnership, Private Limited, Non-Profit organisations.
Disclaimer: This article is for the purpose of information and shall not be treated as solicitation in any manner and for any other purpose whatsoever. It shall not be used as legal opinion and not to be used for rendering any professional advice. This article is written on the basis of author’s personal experience and provision applicable as on date of writing of this article. Adequate attention has been given to avoid any clerical/arithmetical error, however; if it still persists kindly intimate us to avoid such error for the benefits of others readers.
The Author “CA. Shiv Kumar Sharma” can be reached at mail –[email protected] and Mobile/Whatsapp – 9911303737/ 9716118384