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The balance sheet, and the three things a lender checks on it
A balance sheet tells a lender whether you can survive a bad quarter. Here is what an underwriter reads on it, how to produce one, and the entries that stop files.
A balance sheet is a photograph of your business taken on one specific day. It lists what you own, what you owe, and the difference between the two. A lender uses it to answer a single question that a profit and loss statement cannot answer: if the next quarter is bad, does this business have anything to absorb it with.
The whole document is built on one equation. Assets equal liabilities plus equity. What you own is funded either by money you owe to somebody else or by money that belongs to the owners. If those two sides do not match to the penny, the report is broken, and an underwriter will send it back before reading anything on it.
Who asks for it and when
Revenue based products almost never ask. A merchant cash advance runs on deposits, so nobody is going to request a balance sheet for a $40,000 advance. The document becomes mandatory as soon as the money gets cheaper, longer, or secured: bank term loans, SBA 7(a) files, commercial real estate, larger equipment deals, and every form of asset based lending, where the balance sheet is not supporting evidence but the actual collateral pool.
It is requested alongside the profit and loss statement, and the two must carry the same end date. A profit and loss through June 30 paired with a balance sheet dated March 31 is an immediate follow up request and usually a lost week.
What the underwriter reads, line by line
- Cash, first and always. Not because cash is impressive but because it is the buffer. An underwriter compares your cash position to roughly two months of operating expenses. A business with $210,000 in monthly costs and $9,000 in the bank is a thin file no matter how good the revenue line looks.
- Accounts receivable, and how old it is. The total means little without the age. $340,000 of receivables where a third is past ninety days is not $340,000 of value, it is closer to $220,000 with a collection problem attached. Expect the accounts receivable aging report to be requested the moment this number is meaningful.
- Current ratio. Current assets divided by current liabilities. Above 1.0 means the next twelve months of obligations are covered by assets that convert to cash inside the same window. Below 1.0 means they are not, and the lender is being asked to fund into a working capital hole. See how the current ratio is read.
- Total debt, compared to what you disclosed. Notes payable, lines of credit, equipment leases, and current portion of long term debt all sit here. Underwriters tie this section directly to your debt schedule and to the repeating debits in your bank statements. Three sources, one answer expected.
- Equity, and specifically retained earnings. Negative equity means the business has distributed or lost more than it has earned since inception. It is common and it is not automatically fatal, but it must be explainable. Large owner draws in a profitable year read very differently from four consecutive losing years.
- Due to and due from shareholder. These two lines get read closely on closely held businesses. Money the company owes you can often be subordinated to help a deal. Money you owe the company is a live question, especially on an SBA file.
The stack above is the same question in picture form. A business with $840,000 of assets financed by $560,000 of debt has $280,000 of equity, which is a third of the balance sheet. Push the debt to $760,000 and equity falls to $80,000, and the same revenue now supports far less new borrowing, because there is nothing left underneath it. This is why two businesses with identical revenue and identical profit can receive very different answers on the same request. The profit and loss statement explains what happened last year. The balance sheet explains how much room is left.
How to produce one that holds up
- 01Reconcile the bank accounts first
An unreconciled balance sheet is fiction. If the cash line in your accounting software does not match the closing balance on your bank statement for the same date, nothing below it can be trusted either.
- 02Run it as of the same date as the profit and loss
In QuickBooks or Xero, open Reports, choose Balance Sheet, and set the as of date to the last day of your most recent closed month. Use that identical date on both documents.
- 03Check that it balances
Total assets must equal total liabilities plus equity exactly. Software normally forces this, but a manual spreadsheet frequently does not, which is the fastest way to lose credibility on an otherwise fine file.
- 04Chase down the placeholder accounts
Opening balance equity, undeposited funds sitting at a large number, and suspense accounts all signal that the books were set up and never cleaned. Each one invites a question you do not want to answer under a deadline.
- 05Make every debt on it match your debt schedule
Same lenders, same balances, same date. If a lease appears on the balance sheet and not on the schedule, the schedule is the document that loses.
Clean versus a balance sheet that draws questions
| Line | Reads clean | Draws a question |
|---|---|---|
| Cash | Roughly one to two months of operating expenses | Under a week of expenses, or a number that never moves |
| Accounts receivable | Ages consistent with your industry terms | A third or more past ninety days, or one customer dominating |
| Inventory | Turns at a rate that matches the revenue line | Growing while sales are flat, which usually means dead stock |
| Notes payable | Matches the debt schedule and the bank statement debits | Lower than the interest expense on the profit and loss implies |
| Equity | Positive, or negative with a documented reason | Negative and shrinking across consecutive years |
| Due from shareholder | Zero or small and explainable | A large loan to the owner in the year you are asking to borrow |
The mistakes that cost real money
- Sending a stale date. A balance sheet more than about ninety days old gets rejected on bank and SBA files. If your closing slips a month, expect to refresh it.
- Booking personal assets into the business. A boat or a personal vehicle sitting in fixed assets does not strengthen the file. It creates a question about what else is mixed together, and on an SBA file it can require untangling before closing.
- Carrying receivables you will never collect. Leaving four year old invoices on the books inflates assets and destroys credibility when the aging report arrives and shows them. Write them off before the file goes out, not during underwriting.
- Ignoring the current portion of long term debt. Payments due in the next twelve months belong in current liabilities. Leaving them in long term makes your working capital ratio look better on paper and gets corrected by the underwriter anyway.
- Assuming nobody will check. Every number here is cross referenced against your tax return, your bank statements, and your filed returns. The balance sheet is where inconsistencies between the other documents become visible.
What we do with this
Exp Capital Solutions is a broker, not a lender. We do not prepare your financials and we do not approve anything. What we do is read the balance sheet the way the credit desk will, flag the two or three lines that are going to generate questions, and get them explained in writing before submission instead of after. Then we place the file with the funding partners whose credit box actually fits it. If your balance sheet says you should be borrowing less, or borrowing cheaper somewhere else, we will tell you that, even when it pays us less.