Synopsis: Verifying your income and assets helps the lender to tailor business loans according to your business’s specific risk profile. This ensures responsible lending practices while providing businesses with the capital they need to grow and operate. 

As per a survey by ACFE, financial institutions around the globe lose 5% of their revenue annually due to fraud. Even in India, 5.4% of borrowers defaulted in April-June 2023, against 4.2% in 2022, says the RBI study. Considering the high default rates in metro, urban, and rural regions, approving loans is a delicate balance between supporting growing businesses and mitigating risk. This is where income and asset verification becomes important for lending companies. 

What is Verification of Income and Assets?

When you apply for a business loan, lenders analyze your business’s financial health to determine your ability to repay the debt. That’s where verification of income and assets becomes important. The process involves the lender verifying your business income streams and revaluing your assets to acknowledge your financial stability. You might receive a request from the verification team to produce documents like tax returns, bank statements, certificates of deposits, etc.

Verification of income and assets is crucial for lenders to assess the risk of a business loan. Here’s why:

• Loan Repayment: Income shows your business’s ability to generate cash flow, which is essential for repaying the loan. Similarly, your assets provide collateral, which a lender can seize if the loan defaults.
• Loan Terms:  Based on income and assets, lenders determine the loan amount, interest rate, and repayment schedule. Stronger financials allow for better loan terms for the borrower.

For borrowers, verification ensures responsible lending. It avoids getting a loan they can’t repay and protects their creditworthiness.

Why do Lenders Need Income and Asset Verification?

Lenders verify income and assets for two key reasons:

To reduce risk:

A recent study report states that the typical loan default rate in metro and urban regions is 3.3%, and it goes up to 4.1% in rural areas. Proof of income shows your business’s capacity to generate sufficient cash flow to cover loan payments. When you have the means to pay your loans each month, lenders find you low at the risk of defaults and high on the scale of a reliable customer.

To determine loan terms

Your income and assets influence the loan amount, interest rate, and repayment terms. For instance, businesses with consistent income streams and valuable assets stand eligible for larger loan amounts at lower interest rates. Lenders may also offer them loans with lower monthly payments.

What is Verification of Income?

Verifying your income involves reviewing various documents by the lender to build a comprehensive picture of your financial stability. In this regard, the lenders typically ask for the following documents.

Most recent checking account statements

Your most recent income statements represent your business’s income flow. You will be requested to furnish documents related to customer payments, sales revenue, and any other incoming funds. These documents represent your official average monthly earnings and the consistency of your income streams.

Current savings account statements

Your savings account might not directly reflect your current income. However, it shows your ability to save and manage finances. On the other hand, if you’re constantly overdrawn, you might not meet your loan repayments in the future.

Monthly debt obligations

Lenders must also understand your financial commitments before finalizing your business loan. They might ask for documents related to mortgage payments, utility bills, and other recurring expenses to understand your monthly outgoing funds. This analysis helps them determine how much additional loan repayment your business can handle.

Other loans in your name

If you have any other loans, such as personal, student, or auto loans, this can impact your debt-to-income ratio. A high ratio will indicate a higher risk of default and can impact your eligibility or loan terms.

Most recent credit card statement

Your credit card statements reveal your CIBIL scores and spending habits. A good credit history can influence your lender’s decision and the loan terms offered.

What is Verification of Assets?

Income verification allows lenders to know the true earning power of your business, but it only represents part of your financial capability. That’s why lenders also verify your asset base. It involves checking valuable resources your business owns, such as:

Cash and Cash Equivalents

Checking accounts

Lenders verify the readily available funds in your checking accounts that can be used for immediate financial liquidity. They also analyze your average balance over a while to acknowledge your short-term expenses and capacity to meet initial loan repayments in time.

Savings accounts

Similar to checking accounts, savings accounts represent your liquid assets. Though they do not directly represent your income, a healthy account balance indicates your responsible financial management power. It also assures lenders of your potential reserves for unexpected situations.

Investment Accounts

Stocks, Mutual funds, and ETFs

Lenders are also interested in weighing your investment portfolio value, which includes stocks, mutual funds, and ETFs (Exchange Traded Funds). Unlike checking and savings accounts, these assets might not be readily available for liquidation. However, they represent potential future income streams or collateral.

Certificates of deposits (CDs)

CDs are time deposits that earn interest. They represent your savings portfolio, which can be used for funds for a specific period. CDs might partially contribute to some level of liquidity, but they still represent your overall asset value.

Bonds

Bonds are fixed-income investments that represent loans made to governments or corporations. As bonds can be sold to provide a predictable income stream, they can be considered as valuable assets during loan verification.

Retirement Accounts

IRA/401(k) and other retirement accounts

Retirement accounts like IRAs or 401(k)s are not directly accessible for business purposes. However, they represent your long-term financial planning and potential for future asset growth. Therefore, depending on the loan type and lending policy, these accounts might sometimes be considered during your overall asset valuation.

How to Streamline Your Income and Assets Verification for a Smooth Loan Application

Here are some key steps to ensure a smooth and efficient process.

Collect all necessary paperwork in advance.

Do not wait until the lender requests documents. Before applying for business loans, collect all your documents for verification in advance. When you prepare in advance, you minimize the delays in processing your application. In this regard, you can refer to the lender’s list of requirements to ensure you have everything they need.

Organize Your Documents

Don’t send a disorganized pile of statements and receipts. Clearly label and chronologically arrange all documents for each category, such as income, debt, assets, etc. This makes it easier for the lender to review the information and reduce the risk of errors or missing details.

Maintain Accurate Records

It is imperative to ensure your accounting records are up-to-date and accurate. Reconcile your bank statements regularly and maintain clear documentation for all income and expenses. This transparency will help you build trust with the lender and will simplify the verification process.

Minimize Outstanding Debt

A high debt-to-income ratio can raise red flags for lenders. Consider reducing existing debt obligations before applying for a loan. Lenders will demonstrate your financial responsibility and will help you improve your chances of qualifying for favourable loan terms.

Highlight Positive Trends

Highlight in your application any steady upward trend in your business income and showcase any growth in your asset base over time. This positive financial trajectory reassures lenders of your business stability and future potential.

Be Transparent and Communicative

If there are any discrepancies or concerns about your financial documents, proactively address them with the lender. Maintaining open communication with your lender helps you build trust and provide any necessary clarifications to aid the verification process.

If you’re applying for a business loan for the first time, working with the lenders for income and asset verification can feel overwhelming. However, partnering with a digital lending platform can significantly ease the process. Digital lending platforms enable you to securely submit your financial documents for verification through their online portal. This saves your time and lowers the risk of lost paperwork. They also use high-end technologies to automatically retrieve information from your bank accounts or investment firms to quicken the verification process. As the entire process gets streamlined, you receive faster loan decisions and easily seize time-sensitive business opportunities.

End Thoughts

Verification of your income and assets helps lenders gain a comprehensive picture of your financial stability. A strong asset base improves your loan eligibility and qualifies you for larger loan amounts at favourable interest rates and repayment terms. However, remember that a well-organized and transparent presentation of your financial health is the key to securing loans at the best possible terms. In this regard, partnering with a digital lending platform simplifies the process and empowers you to close deals easily.