A borrower finishes March with more cash than it held in January. That looks reassuring until the lender discovers that the increase came from a new loan, customer receipts have fallen and the business has paid a dividend. The closing bank balance is accurate, but it answers only part of the credit question.
Bank statement analysis for business lending helps establish where cash comes from, how it is spent and whether the borrower can meet obligations as they fall due. It is particularly useful when management reporting arrives late or the accounts need further reconciliation. The analysis should connect bank activity to the financial statements, debt schedule and forecast before it informs a lending decision.
Establish the account coverage and review period
Request statements for all relevant operating, deposit and payment accounts, together with details of overdrafts, merchant processors and receivables-financing arrangements. Confirm which legal entity owns each account and whether any balances are restricted, pledged or held on behalf of others.
A sensible starting review period is a full trading year, extended where seasonality, recent growth or financial stress makes a longer comparison useful. Three months can illustrate a method, as below, but cannot establish a complete annual cash pattern. Request the latest available period and compare it with the same months in the prior year.
Confirm that statements cover continuous periods and retain the originals. Documents supplied by the borrower may need independent verification through the lender’s approved process. Converting a file or reconciling its arithmetic does not authenticate it.
Prepare and check the transaction data
For PDF statements, Accounts Draft can convert bank transactions into Excel, making it easier to prepare a schedule for underwriting review. Check the extracted information against the source statements before calculating trends or drawing conclusions.
Keep the account, date, description, money in, money out and source reference for each transaction. Review ambiguous descriptions rather than assigning them automatically to a convenient category. For every account, opening cash plus receipts less payments should equal closing cash.
Pair internal transfers across the accounts in scope. A £50,000 transfer from savings to the operating account increases credits on one statement but creates no new cash for the combined business. If the other side cannot be found, establish whether the sending account is missing or the payment actually came from another entity.
Keep currencies separate until a consistent translation method is applied. Where a loan is paid out net of fees, reconcile the net bank receipt to the gross debt obligation and the associated charges.
Separate customer receipts from other credits
Bank credits can include loans, capital contributions, owner funding, asset sales, refunds and transfers as well as customer collections. Categorise these separately. A large credit from a finance provider might be an advance against receivables, rather than payment from a customer.
Merchant settlements need additional attention because fees, refunds and chargebacks may be deducted before cash reaches the bank. Reconcile net settlements to processor reports. Identify customer concentration using the underlying customer ledger where the payment description does not identify the ultimate customer.
In a cash analysis, VAT-inclusive receipts and the related VAT payments can both remain in the schedule, provided the treatment is consistent. When comparing receipts with revenue reported net of VAT, prepare an explicit VAT and timing bridge. Do not equate the two figures without those adjustments.
Work through a borrower example
The following fictional borrower, Westbridge Distribution, has one consolidated cash schedule. Figures are in £000. Internal transfers have been removed. Operating payments exclude tax, maintenance capex and debt service, which are shown separately. The example assumes no other cash movements, and all cash balances shown are unrestricted.
| Cash movement | January | February | March |
| Opening cash | 30 | 50 | 45 |
| Customer receipts | 260 | 240 | 230 |
| Operating payments | (205) | (210) | (210) |
| Tax paid | (10) | (10) | (10) |
| Maintenance capex paid | (5) | (5) | (5) |
| Cash available before debt service | 40 | 15 | 5 |
| Existing cash interest and principal | (20) | (20) | (20) |
| New loan proceeds | 0 | 0 | 80 |
| Dividends paid | 0 | 0 | (40) |
| Net movement in cash | 20 | (5) | 25 |
| Closing cash | 50 | 45 | 70 |
March’s bank records also contain a £50,000 transfer between accounts in scope. Looking only at the receiving account could suggest £360,000 of incoming cash: £230,000 of customer receipts, £80,000 of borrowing and £50,000 of internal transfers. Only £230,000 represents customer collections.
The table reconciles, but the pattern requires investigation. Customer receipts fall by £30,000 across the period while operating payments rise by £5,000. Cash available before debt service drops from £40,000 to £5,000. The business cannot meet March’s £20,000 debt service from that month’s internally generated cash on the basis shown.
Without the new borrowing and dividend, March would have ended with £30,000: opening cash of £45,000 plus £5,000 available before debt service less £20,000 of debt payments. The reported £70,000 closing balance is supported by financing.
Assess repayment capacity using explicit definitions
Over the three months, cash available before debt service totals £60,000 and existing debt service also totals £60,000. Dividing those figures gives an illustrative cash coverage ratio of 1.00 times. The monthly ratios are 2.00, 0.75 and 0.25 times, showing why the aggregate can conceal a deteriorating position.
This is a historical cash-based measure for the example, not a covenant calculation. A loan agreement may define cash flow, permitted adjustments and debt service differently. Reconcile to those definitions separately, including the treatment of leases, fees and any other obligations.
Suppose a proposed facility would add £8,000 of monthly debt service from the next month. At March’s cash-generation level, available cash of £5,000 would be £23,000 below combined monthly debt service of £28,000. That comparison identifies the need for a credible forecast and supporting evidence; it is not a prediction that the next month must repeat March.
The OCC’s commercial lending guidance discusses operating cash flow as a source of repayment. The practical question here is whether the business can generate sufficient cash over the life of the facility, including periods when working capital absorbs liquidity.
Investigate the explanation before drawing a conclusion
Ask whether falling receipts reflect seasonality, lower sales, delayed collections or a major customer problem. Compare monthly sales, aged receivables and subsequent receipts. If turnover is stable but receivables are rising, weaker collection may explain the change. If both sales and receipts are falling, the forecast needs to address the underlying trading decline.
Review supplier ageing and payments after the period end. Cash generation can appear stronger when suppliers are being paid late. Check payroll, tax, rent and other scheduled obligations against supporting records, including payments that were due but never appeared in the bank.
Establish the terms and repayment profile of the £80,000 borrowing. Confirm when its interest and principal payments begin and whether those payments are included in the forward debt schedule. Investigate the £40,000 dividend in the context of liquidity, shareholder expectations and the applicable financing documents.
Inspect daily or weekly balances around payroll and debt-payment dates. A month-end balance may miss a low point earlier in the month. Available overdraft headroom should be assessed using the facility’s terms and availability, rather than treating the headline limit as unrestricted cash.
Build a reviewable underwriting worksheet
Keep a transaction tab, a monthly cash summary and an exceptions log. The transaction tab should retain the original descriptions, categories and source references. The summary should separate operating cash, investment, borrowing and distributions. The exceptions log should record what remains unverified and who will obtain the evidence.
Useful review checks include:
- Every account reconciles to its statements and the consolidated cash balance.
- Internal transfers are removed without losing either side of the source trail.
- Loan proceeds, owner funding and customer collections are separately identified.
- Debt payments agree to the schedules, with new obligations reflected in the forecast.
- Unpaid liabilities and restricted cash are visible alongside the bank analysis.
- Downside assumptions explain how collections, payment timing and liquidity change.
For Westbridge, the next underwriting step is to resolve the decline in collections and rebuild the forecast around verified obligations. The larger closing balance should not be used as evidence of stronger trading. The lender needs a supported explanation of how the borrower will generate and retain the cash required to repay the proposed facility.