When a business applies for finance, the lender isn't simply interested in how much money it makes.
It wants to understand whether the business is likely to be able to repay what it borrows.
That can mean looking at profitability, cash flow, existing debt, the balance sheet and the quality of the financial information available.
Exactly what a lender asks for will depend on the type and size of finance, the lender and the business itself.
But there are some common areas worth understanding before you start the conversation.
1. Revenue
Turnover gives a lender an indication of the size of the business and the level of activity going through it.
They may also be interested in how revenue has changed.
Is it growing?
Is it stable?
Is it seasonal?
Does the business rely heavily on one customer?
A £2 million business isn't automatically stronger than a £1 million business simply because its turnover is higher.
Revenue provides context. What happens to that revenue afterwards is often more important.
2. Profitability
A lender will normally want to understand whether the business is profitable and how consistently it generates profit.
That means looking beyond turnover at the relationship between income and costs.
Depending on the business and the finance being considered, attention might be given to operating profit, net profit or measures such as EBITDA.
Trends matter too.
If profit has fallen significantly, the lender may want to understand why.
That doesn't necessarily mean finance won't be available. There may be a perfectly reasonable explanation.
But having financial information that helps explain what changed and why makes that conversation much easier.
3. Cash Flow
A profitable business can still struggle to repay borrowing if it doesn't generate cash at the right time.
Customers might take a long time to pay.
The business might hold significant stock.
VAT and tax payments can create large outflows.
Equipment purchases, loan repayments and other commitments can all consume cash without appearing as normal operating expenses in the profit and loss account.
That's why lenders may look at cash generation as well as accounting profit.
For the business owner, understanding the distinction is just as important.
Profit tells you whether the business is making money. Cash tells you whether the money is available when you need it.
4. Existing Borrowing and Repayments
A lender will also want to understand the financial commitments the business already has.
That might include:
Bank loans
Overdrafts
Asset finance
Hire purchase
Commercial mortgages
Other business borrowing
The important question isn't simply how much debt exists.
It's what repayments the business is already committed to and whether there is sufficient capacity to take on more.
A business with debt isn't necessarily a weak business. Borrowing can be a perfectly normal way to finance investment and growth.
The lender simply needs to understand the complete picture.
5. The Balance Sheet
Business owners naturally tend to focus on the profit and loss account.
Lenders may pay considerable attention to the balance sheet too.
It can show things such as:
Cash
Trade debtors
Trade creditors
Loans
Tax liabilities
Assets
Director's loan accounts
Overall net assets or liabilities
It also provides useful context for the profit figure.
A business might report a good profit while carrying significant overdue creditors or large amounts owed by customers.
This is one reason good management accounts should include a properly reviewed balance sheet.
6. How Reliant the Business Is on Particular Customers or Income
The quality of revenue can matter as well as the amount.
A lender may want to understand whether income is spread across many customers or heavily dependent on one or two.
For some businesses, recurring or contracted revenue can also provide useful context about future income.
For others, seasonality may be completely normal.
There isn't one perfect revenue model.
The important thing is being able to explain how the business makes money and any significant risks within that model.
7. Historic Accounts
For established companies, lenders will often ask for recent statutory accounts.
These provide an independently prepared historic picture of the business and allow performance to be compared across accounting periods.
This is one reason having company accounts prepared accurately and on time matters beyond simply meeting the Companies House and HMRC deadlines.
However, statutory accounts are historic by their nature.
If the company's year end was several months ago, the lender may want something more current as well.
8. Up-to-Date Management Information
This is where management accounts can become particularly useful.
If the most recent statutory accounts describe a business as it looked nine or twelve months ago, they may not reflect its position today.
Current management information can help show what has happened since.
Depending on the circumstances, that might include:
A current profit and loss account
A reviewed balance sheet
Recent management accounts
Cash information
Comparisons with previous periods
Explanations of significant changes
The purpose isn't simply to produce more reports.
It's to give the lender a more current picture of the business.
9. Forecasts
For some finance applications, particularly where the borrowing is connected to future growth or investment, a lender may ask for forecasts.
A forecast is different from historic financial reporting.
It isn't evidence of what has happened.
It's an informed view of what might happen based on assumptions about the future.
Those assumptions therefore matter.
If sales are forecast to increase substantially, what is expected to cause the increase?
If margins improve, why?
If additional staff are needed, have their costs been included?
A useful forecast should allow somebody to understand the assumptions behind it rather than simply presenting an attractive end result.
10. Whether the Numbers Make Sense Together
One of the most important things is consistency.
The profit and loss account, balance sheet, cash position, historic accounts and forecasts shouldn't feel like completely separate pieces of information.
They should tell a coherent story about the same business.
If revenue has grown dramatically but cash has fallen, there may be a perfectly sensible explanation.
If profit has increased but borrowing has also increased, again, there may be a good reason.
The important thing is understanding it.
That starts with having bookkeeping and financial records you can rely on.
The Quality of the Numbers Matters
Accounting software has made financial information much easier to produce.
A business owner can open Xero and generate a profit and loss account or balance sheet in seconds.
AI can now help analyse those reports too.
But a lender isn't helped by a beautifully presented report if the information behind it isn't accurate.
If transactions are missing, balances haven't been reconciled or accounting adjustments haven't been made, the report may not give a reliable picture of the business.
Being able to produce a report isn't the same as being able to rely on it.
This is why good bookkeeping, accounting and appropriate review remain important even as financial technology becomes more capable.
Don't Wait Until the Finance Application to Understand Your Numbers
If you're planning to apply for finance, it helps to understand your financial position before the lender starts asking questions.
Can you explain why profit changed?
Do you understand your cash position?
Do you know what the business already owes?
Are the latest accounts representative of the business today?
Are your current financial records up to date?
You don't need to predict every question a lender might ask.
But you should be able to explain the financial story of your own business.
And ideally, that shouldn't only happen when you need to borrow money.
Reliable financial information is useful because it helps you understand the business before somebody else asks you to explain it.