Preparing financial statements for a bank loan in Canada

Start by asking what the lender needs

BDC explains that banks review financial statements to understand financial health, profitability and the ability to repay debt. For larger loans, statements prepared by an accountant have generally been needed for the past two years. Banks may also ask for interim statements prepared internally so they can see recent results.

For a smaller loan, tax returns can sometimes stand in when a business has no financial statements. That is a general pattern, not a rule you can count on. Ask the lender, in writing if possible, which documents and which periods it wants before you spend time assembling anything.

The core package

Most requests centre on three items. The balance sheet shows what the business owns and owes at a date. The income statement shows revenue and expenses over a period. A cash flow forecast looks ahead. Tax returns may also be requested as supporting records, depending on the lender and the size of the loan.

Interim statements usually cover the period since your last year end. BDC says a bank will generally look at results for the last couple of years, so keeping the categories in your accounts consistent from year to year makes those comparisons easier to explain.

Get the books ready before the statements

Statements are only as reliable as the bookkeeping behind them. Before anything is produced, reconcile every bank and credit card account, record all supplier bills and loan payments, and clear uncategorized transactions. Review the closing process in our month-end close guide so the same steps are done each period.

Check owner transactions too. Money you put in, money you took out and personal costs paid by the business should be recorded in the right accounts. A shareholder loan balance that has built up unexplained will draw questions, and it can have tax consequences you should discuss with your accountant.

Know what the bank will calculate

According to BDC, banks commonly estimate borrowing capacity with a fixed charge coverage ratio based on EBITDA, and may look at the debt service coverage ratio, which compares EBITDA with interest and principal payments due. Lenders also look at debt-to-equity, which compares total liabilities with shareholders’ equity. Loan agreements may require you to keep certain ratios at set levels.

You do not need to memorize the formulas, but you should know your own results before the lender does. A simple illustration: if a business earns $120,000 of EBITDA and must pay $80,000 of interest and principal in the year, the debt service coverage ratio is 1.5. These numbers are invented for illustration only, and each lender defines its own adjustments.

Build a forecast you can defend

BDC says banks typically want a monthly cash flow forecast covering the rest of the current year and the following year, and sometimes two years. Some lenders ask for two versions, one with the loan and one without. It also warns that overly optimistic figures can hurt your credibility.

Start from reconciled cash and base each month on evidence such as signed contracts, past seasonal patterns and known payment dates. Show the loan payments as an outflow. If you need help with the method, see our article on a 13-week cash flow forecast and the cash runway tool for a simplified view.

Prepare the supporting detail

Lenders may ask for aged receivables and payables reports, which show who owes you and whom you owe. Review them first. Overdue customer balances and late supplier payments both tell a story, and it is better if you have already explained them. Our article on collecting receivables faster covers the practical side.

BDC also notes that lenders look at the sources of any down payment, ownership details for owners holding more than 25% of the shares, and often a personal guarantee. Gather identification, ownership records and personal financial information early, since these items tend to be the slow ones.

Common mistakes

The most frequent problems are statements that do not match the tax return without explanation, interim figures produced from unreconciled accounts, and forecasts that assume every sale arrives on time. Another is applying for more than the cash flow can support. BDC describes cash flow as the starting point for how much a bank is willing to lend.

Credit also matters. BDC states there is no specific credit score needed to get a business loan, and some loans do not consider it at all, but lenders may check both your personal score and the company’s credit report. Look at both before you apply.

What to bring to your accountant

Bring the lender’s document list, the last two years of statements and tax returns, current-year records, the loan purpose and amount, and any quotes or purchase agreements. Ask which statements the lender will accept, whether the figures need adjusting before submission, and what ratios the loan could require you to maintain.

Sora’s financial management and bookkeeping services can help organize the records and projections. Which level of statement the lender requires is the lender’s decision, so confirm it directly rather than assuming.

Allow time. Reconciling accounts, producing interim statements and building a forecast rarely happen in a single afternoon, and a lender may come back with follow-up questions once it has read the package. Starting several weeks before you need the funds leaves room for that conversation and for corrections.