Financial institutions need as much help as they can get when making lending decisions to small businesses. It’s critical to have as much information as possible about the business applying for the loan, so your organization lessens its risk exposure.

Analyzing an applicant’s bank statements is a crucial step in the loan process, since it allows you to see their cash flow and offers an overview of the company’s financial health.

Bank Statement Analyzer (BSA) tools make the analysis process more efficient, allowing you to make more lending decisions in a shorter period of time.

Let’s take a closer look at the bank statement analysis process and the available tools so you can see how they can benefit your financial institution.

The Importance of Bank Statements in Lending

Financial institutions require bank statements from small business borrowers for several reasons:

  • Underwriting. Banks and other financial institutions perform background checks on the financial health of borrowers and evaluate their creditworthiness through a process called underwriting. Through underwriting, lenders can determine if the loan is an acceptable risk and if the loan applicant can repay the loan on time. Bank statement analysis helps lenders determine the source of bank deposits, real-time assets, and income verification.
  • Loan approvals. Loan applicants typically provide current bank statements for further financial auditing and cash flow analysis. In addition to identifying all sources of income, by analyzing the statements, banks can also determine total annual earnings, interests paid, and other financial responsibilities. This data aids in the decision-making process, helping determine how large a loan borrowers may be eligible for.
  • Income tax verification. Bank statement analysis also helps financial institutions estimate the amount of taxes that should be paid and if the transactions back up the income tax reports.
  • Prevent fraud. Banks and other financial institutions look for patterns in repeated transaction data to help them identify incidents of financial fraud. Statement analysis allows lenders to crosscheck transactions displayed on the business’s ledger versus what is reflected in account statements.

Bank statement analysis is a time-consuming process, with many opportunities for human error, resulting in credible loan applicants being turned away and underqualified borrowers getting approved.

What to Look for on Clients’ Bank Statements

The underwriter’s job is to analyze bank statements and assess how much risk a lender will take on a potential borrower’s loan. Here are a few things underwriters view as a concern on bank statements:

  • Insufficient savings: Underwriters want to see sufficient savings in case the borrower loses business or the economy experiences a downturn. Every lender has its own standard for the amount they want to see in savings, but at least several months’ worth of payments is preferred.
  • Erratic income: Are there regular sources of income indicated in the bank transactions? Have there been any drastic changes over the last few months? The lender may require additional past bank statements to look for other income swings.
  • Questionable large deposit. A large, sudden deposit could indicate another loan has been taken out, which means additional debt, affecting the borrower’s debt-to-income ratio. 
  • Too many overdrafts. Underwriters need to flag overdraft fees, which indicates that the borrower is not careful with withdrawals.

Bank Statement Analysis Without Automation

Manual underwriting is more time-consuming than automated underwriting and usually requires more documentation. This is one of the primary reasons that banks choose to implement underwriting software. Before automation, a business loan underwriter would need to collect and manually analyze the following from the borrower:

  • Bank statements (ranging from three months to three years)
  • Tax returns for the past two or more years
  • Resumes of owners and key management personnel
  • Recent business plan, including the budget for the business loan
  • A current business credit report
  • A recent personal credit report
  • Business financial statements (balance sheet, income statement, and cash flow statement)
  • Accounts receivable and accounts payable
  • Collateral 
  • Business-related legal documents such as licenses and permits, incorporation papers, contracts, etc.
  • Federal Tax Identification Number or Employer Identification Number (EIN)

While the credit report contains information about the borrower’s relationship with debt and credit card usage, it also reveals late or missed payments and their credit score. In case of insufficient data, the underwriter may need to collect other documentation such as proof of lease and utility payments. In addition, a letter of explanation may be necessary to clarify or verify information on the report. 

The borrower’s financial statements contain crucial information about income, assets, liabilities, debt, and other recurring payments. The lender may also require a list of collateral to secure the loan.

Once all the material is gathered, the underwriter has to comb through all the documentation, including the bank statement data, do a credit assessment, and “follow the money” by manually checking where the money comes in from and where it goes out. 

Before automation, manual underwriting could take weeks to over a month, depending on the complexity of the documentation. In addition, the process was time-consuming and more costly since lenders (and borrowers) had to pay extra fees to cover the underwriters’ expertise.

How a Bank Statement Analyzer Improves Loan Decisions

The manual underwriting process faces many challenges, including the bank statement’s lack of uniformity (bank statements vary in content, format, and narrations). The statements also come in different file formats, such as PDF, scanned images, or XML files. A good bank analyzer tool should be able to adapt to all formats, read the bank statement data, and organize the data all before an underwriter has to take a look at any spreadsheets or pore over PDFs. 

By employing Optical Character Recognition (OCR), banks and fintech lenders can monitor, process, and assess large amounts of transaction data in a much shorter time period than an underwriter can do manually. OCR also accelerates customer onboarding by eliminating the need for manual input and minimizing the likely potential human error. 

Finally, bank statement analysis software helps cross-reference data and validate information to protect financial institutions from fraud, which speeds up the decision-making process. A faster process means more business for the institution and a better experience for the customer. Getting decisions on your loan application faster is always something that small business owners appreciate. A bank statement analyzer tool makes it possible for a lender to deliver on this promise while not compromising on underwriting standards.

Real-Life Example: How Biz2X’s Bank Statement Analyzer Works

The Biz2X Bank Statement Analyzer (BSA) tool automatically extracts information from a small business’s raw PDF bank statements or data received directly via API from the borrower’s bank. It automatically classifies information such as the type of transaction and transactional trends (e.g., cash flow increase/decrease) and creates financial spreads for underwriting a loan (e.g., Debt-Service Coverage Ratios).

By doing these things, the Biz2X Bank Statement Analyzer lowers credit risk in decision making by integrating the institution’s credit policies automatically when assessing the data identified on the corresponding loan from the application stage through underwriting. This results in speeding up loan decisions. A speedier loan application also saves the institution money by automating many steps of the loan process formerly done manually.
In simple terms, the BSA tool evaluates a customer’s ability to borrow and determines and recommends pricing—all automatically.

The BSA tool uses a streamlined user interface, AI-driven analytics, and a customizable white label environment to help financial institutions enhance their essential services, such as offering personalized customer service, expanding their portfolio, and increasing the use of their different products.

The advances in risk management are one of the best benefits for the platform’s users. It uses AI and machine learning (ML) models to automate crucial risk assessment duties within the purview of the lender’s credit policy. By combining Natural Language Processing, image analytics, and API-sourced data from millions of loan applications, the BSA offers lenders a way to automate manual tasks in the underwriting process and improve customer experience without compromising on the quality of loan analysis.

Plus, because Biz2X’s Bank Statement Analyzer is part of the SaaS Biz2X platform, there is no need to purchase expensive hardware to set up the system. Lenders can choose which components of Biz2X they want to implement, and launch those components fast (often in as little as a few weeks).

Biz2X also offers end-to-end loan management features, including:

  • End-to-End Digital Native Lending Platform
  • Configurable rule engine and Workflows powering the Underwriting and User Journeys
  • Rich UI/UX capability with UI Orchestration
  • AI-based analytical engine across the platform for deeper insights
  • Bank Statement Analyzers, GST Insights, as well as Continuous Risk Monitoring
  • Low-Code Platform—helping faster roll-out, including white-labeled journeys
  • Deployment Flexibility—Dockerized Platform, private and industry cloud

The Biz2X platform stands out from its competitors with its omnichannel digital application that provides a user-friendly dashboard to manage customers directly via mobile, desktop, or in-branch. Biz2X offers a comprehensive, end-to-end digital lending platform that manages the entire loan cycle from customer sourcing and origination to collections. In addition, its fully configurable rules and decision engines make decision-making easier, more intuitive, and quicker. 

And now, with the addition of the Bank Statement Analyzer, the platform is more powerful than ever. If you prefer, the BSA can be purchased separately, and your institution can use it in conjunction with your current solution.

Towards Automated Bank Statement Analysis

Whether lenders are looking to automate more of their lending workflows, or they want to equip their human underwriters with more insights, faster, bank statement analysis is going to be a key part of the solution. A Bank Statement Analyzer solution can help to deliver on both of these great promises.

However it is used, the technology incorporated in these BSA solutions helps lower your institution’s risk exposure so you make more sound lending decisions at the speed of business. Learn more about the Biz2X Bank Statement Analyzer and more Risk Analytics tools by speaking to a lending platform specialist.