When you apply for funding, lenders aren’t just reviewing your application they’re reading between the lines of your financial statements.
Your profit & loss, balance sheet, and management accounts tell the story about your business. The key is to make sure it’s telling the right one.
In this issue, we’ll unpack what lenders look for, which numbers matter most, and how to present your financials in a way that boosts your borrowing power.
1. Why financial statements matter to lenders
Lenders rely on your financial statements to answer three fundamental questions:
- Is this business profitable (or on the path to profitability)?
- Is there enough cash flow to support repayments?
- Is the business financially stable in the long term (will support the loan repayments during the loan term?)
A well-prepared set of accounts gives lenders confidence. A messy, unclear one? That leads to hesitation or rejection.
2. Common red flags that can hurt your chances
2.1. Consistently low or negative profits
Losses over multiple years or thin margins are red flags, especially if there’s no clear recovery plan.
Example:
- Net profit line showing negative figures in the P&L for the past 3 years
- EBIT or EBITDA decreasing year on year
2.2. Overdrawn directors’ loan accounts
When directors owe the business money, it can indicate poor financial discipline.
Example:
- Balance sheet shows Director’s Loan Account as a debtor (asset), e.g., £45,000 owed to company
- No repayment schedule or increase year-on-year
2.3. Declining revenue trends
A shrinking top line can suggest falling demand, poor sales performance, or market issues.
Example:
- Turnover in 2023: £1.2M → 2024: £980K → 2025: £850K
2.4. High debtor days (slow customer payments)
Longer wait times to get paid can create cash flow strain.
Example:
- Trade debtors increasing each year (e.g., from £50K to £90K) while sales remain flat
- Debtor days > 60 days
2.5. Unexplained jumps in costs or drops in margins
Spikes in expenses or eroding margins without justification raise concerns about control or leakage.
Example:
- Gross profit margin dropping from 40% to 28% in a single year
- Admin expenses increasing by 30% while revenue stays flat
2.6. Large short-term liabilities without working capital cover
Big bills due soon without cash or receivables to match can trigger liquidity concerns.
Example:
- Creditors due within 1 year: £350K
- Cash + Debtors: £150K
2.7. Frequent or large dividends despite poor performance
Paying out cash when profits or reserves are low can appear reckless.
Example:
- Net profit: £10K, dividends paid: £30K
- Retained earnings decreasing year over year
2.8. Reliance on one major customer or supplier
Over-dependence creates vulnerability.
Example:
- 80% of revenue comes from one client (shown in notes or customer concentration report)
2.9. Frequent changes in accounting policies or auditors
Regular changes may be a sign of window-dressing or financial manipulation.
Example:
- “Change in depreciation method” in the notes
- New auditor every year for 3 years
2.10. Significant one-off adjustments or exceptional items
Large ‘adjustments’ can distort real performance.
Example:
- “Exceptional item: £100K restructuring cost” that repeats each year
- Adjusted EBITDA differs greatly from actual EBITDA
2.11. High stock levels with low turnover
Tying up cash in slow-moving stock affects liquidity.
Example:
- Stock increasing from £80K to £150K
- Inventory turnover ratio falling below industry norms
2.12. Low cash balances with high borrowings
Weak liquidity combined with debt stress makes lenders uneasy.
Example:
- Cash: £5K, Loans: £200K
- Interest cover ratio < 1.5
2.13. Unpaid taxes or HMRC arrears
These often indicate cash flow issues or financial mismanagement.
Example:
- Notes to accounts show Time to Pay arrangements with HMRC
- PAYE or VAT liabilities overdue
2.14. Rapid growth without control
Fast sales growth without matching systems or capital leads to operational strain.
Example:
- Turnover jumps 100%, but costs explode and margins collapse
- Working capital deficit widens
2.15. High intercompany transactions
Heavy use of related-party transactions can obscure true performance.
Example:
- “Management charges” to or from sister companies totalling 30% of turnover
- Loan balances between group companies with no clear terms
2.16. Negative net assets
When liabilities exceed assets, the business is technically insolvent.
Example:
- Net assets: (£25,000)
- Accumulated losses in P&L reserve
2.17. Contingent liabilities or legal disputes
Hidden risks buried in notes or disclosures.
Example:
- Notes: “Potential liability pending outcome of legal case - up to £100K”
- Guarantees given to third parties
Even if you have a good explanation, the documents alone need to tell a stable and logical story.
3. What lenders want to see in your financials
Lenders don’t just look for red flags, they also seek green lights that signal a healthy, well-managed business. These positive indicators increase your chances of securing funding on good terms.
Each point includes examples of what lenders like to see in the accounts:
3.1. Growth or stability in revenue
Lenders like businesses with consistent or growing income as it shows reliability and demand.
What this looks like:
- Turnover in 2023: £950K → 2024: £1.1M → 2025: £1.3M
- Seasonal businesses showing predictable patterns (e.g. spikes every Q4)
Why it matters:
- Predictable or rising sales = lower risk for repayment
- Shows you're building market share or retaining customers
3.2. Healthy profit margins (or improving ones)
Even if profits are modest, improving margins show that you're managing operations effectively.
What this looks like:
- Gross profit margin increasing from 32% to 38%
- Net profit improving from 5% to 10% of turnover
- Positive EBITDA trends
Why it matters:
- Profits are the fuel for repayment
- Margin improvement can offset slower growth
3.3. Controlled costs and consistent expense ratios
Lenders want to see discipline, steady or declining costs relative to revenue.
What this looks like:
- Overheads remain around 25% of turnover year-on-year
- Staff costs, marketing, rent, etc. growing in line with sales
- No sudden spikes in admin expenses
Why it matters:
- Suggests strong cost control and internal processes
- Prevents profits from being eroded by inefficiencies
3.4. Good liquidity (can you pay short-term obligations?)
Lenders assess whether you can meet your day-to-day bills without a cash crunch.
What this looks like:
- Current ratio > 1.2
- Trade debtors and creditors well-managed
- Cash in bank covers 2–3 months of operational costs
Why it matters:
- Liquidity is vital for survival, especially in downturns
- Healthy cash position shows planning and financial awareness
3.5. A strong balance sheet with limited risky debt
Solid equity and manageable borrowings give confidence to lenders.
What this looks like:
- Positive net assets
- Debt-to-equity ratio below 1.5
- Limited or no overdue loans or high-interest short-term credit
Why it matters:
- Strong balance sheet = lower chance of default
- Low-risk debt structure suggests a sustainable financial model
3.6. Directors financially invested in the business
Lenders favour businesses where the owners have skin in the game.
What this looks like:
- Positive Director’s Loan Account (you’ve lent money to the business)
- No excessive dividend withdrawals
- Share capital funded personally
Why it matters:
- Shows belief in the business
- Reduces risk as you're not just walking away if things get tough
3.7. Realistic and transparent financial reporting
Clear, accurate records build trust. Inflated or over-complicated accounts don’t.
What this looks like:
- Clean set of annual accounts, filed on time
- Well-explained notes and breakdowns (e.g. clear fixed asset schedules)
- No big “adjustments” or unexplained line items
Why it matters:
- Transparency builds credibility
- Lenders feel more confident in their assessment
3.8. Evidence of reinvestment into the business
Lenders like to see profits reinvested into growth and not just withdrawn.
What this looks like:
- CapEx purchases (e.g. new machinery, vehicles, tech)
- R&D or training spend included in expenses
- Retained profits increasing over time
Why it matters:
- Reinvestment shows long-term thinking
- It also enhances business value (and lender security)
3.9. Strong customer base or diversified income
A wide and dependable customer base = lower risk.
What this looks like:
- No single customer makes up more than 20% of turnover
- Recurring revenue model (e.g. subscriptions, service contracts)
- Revenue from multiple sectors or regions
Why it matters:
- Reduces vulnerability to shocks
- Predictable income supports repayment confidence
3.10. Improving KPIs and trends
Even if current figures aren’t perfect, improvement is a good sign.
What this looks like:
- Debtor days improving from 70 to 50
- Stock turnover ratio increasing
- Profit per employee rising
Why it matters:
- Shows you’re identifying and fixing weak spots
- Progress = potential
4. The power of management accounts
Many business owners assume that last year’s accounts are enough. Not true.
Lenders often request year-to-date management accounts, especially if:
- You’re applying mid-way through the financial year
- Your last filed accounts are over 6 months old
- Your business is growing or changing rapidly
Good management accounts show the lender how you’re doing right now—not 12 months ago. And that makes a big difference.
5. How to make your financials lender-friendly
Here’s how to position your statements to speak the lender’s language:
- Clarity is key. Avoid clutter. Use standard formats. Clearly label and explain unusual items.
- Add commentary. If margins dropped due to investment or a one-off event, say so. Lenders appreciate transparency and proactive management.
- Work with your accountant. Ensure the accounts are accurate, timely, and well-structured.
- Work with a specialised accountant. Each sector’s accounts are different. A manufacturing company will have a totally different set on accounts compared to a GP practice or a Charity. You need to get an accountant that knows your sector.
- Provide supporting schedules. If you're in property, include tenancy schedules. If you’ve had tax issues, show your HMRC agreement and proof of payment.
6. Bonus: Know the Buzzwords – EBITDA, Depreciation, Addbacks
Lenders don’t just look at your bottom line—they adjust it.
They may focus on EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) as a proxy for your operating cash flow.
Why? Because it strips out non-cash and one-off items to focus on your core earning power.
You can help your case by highlighting legitimate add-backs (e.g. one-off legal fees, startup costs, etc.) that improve your adjusted EBITDA—just make sure they’re reasonable and clearly explained.
Final thought: your financials tell a story. make it a good one.
Lenders aren’t expecting perfection, but they are looking for credibility.
Your job is to show that your business is well-run, transparent, and capable of servicing the debt you're asking for.
Your financial statements are your voice so make sure they’re saying the right things.
Add comment
Comments