How banks assess business liquidity before lending
A company can be profitable on paper yet lack cash for its next payment. Banks therefore assess current asset quality as well as totals: actual receipts, saleable stock and obligations due first. This article covers liquidity ratios, bank adjustments and supporting documents.
Liquidity is the ability to meet short-term obligations on time. Banks start with the balance sheet but adjust doubtful receivables, obsolete stock, restricted cash and assets not readily convertible into payment. They compare ratios with statements, payment calendars, seasonality and the proposed loan schedule.
What liquidity tells banks about a business
Liquidity answers whether the company can meet obligations falling due over the coming months: suppliers, taxes, payroll, short-term loans, current portions of long-term debt and other mandatory payments.
High revenue does not guarantee liquidity. Cash may be tied up in overdue receivables, excess stock, advances or unfinished projects. Conversely, a temporarily low account balance is not always a crisis where confirmed receipts match payment timing.
Assets exist only on paper
Receivables are uncollectable, goods unsaleable or advances not readily recoverable.
Obligations are understated
Taxes, overdue suppliers, loans and current portions of long-term debt are omitted.
Dates do not match
Customers pay after the company must pay its bank and suppliers.
No reserve
Payments are formally covered, but any deviation creates a shortfall.
Liquidity ratios banks calculate
Ratios and formulas vary with bank methodology, sector and reporting structure. Analysts usually assess several levels of short-term obligation coverage.
Shows total accounting coverage of near-term obligations, not asset quality.
Excludes inventory and other assets needing another cycle before realisation.
Shows obligations coverable by the most liquid resources at the calculation date.
A positive balance provides a buffer, whose adequacy depends on asset quality and the particular business’s needs.
How banks adjust the balance sheet
| Item | What the bank checks | Possible adjustment |
|---|---|---|
| Cash | Whether funds are unrestricted and supported by statements | Exclusion of blocked, pledged or transit amounts |
| Accounts receivable | Age, overdue status, concentration and customer payment discipline | Exclusion of doubtful, related-party or unsubstantiated receivables |
| Inventory | Turnover, age, demand, condition and ownership | Haircuts or exclusion of obsolete and third-party stock |
| Advances paid | What will be supplied, when and whether cash is recoverable | Reduced liquid value for long-dated or disputed advances |
| VAT and other assets | When and under what conditions economic benefit arises | Partial or full exclusion from immediately available coverage |
| Accounts payable | Maturity, arrears, supplier demands and concentration | Clarification of near-term payments and hidden arrears |
| Bank and other loans | Complete reporting and correct maturity classification | Reclassification of near-term long-debt repayments as short-term commitments |
| Taxes and payroll | Accrued, overdue or expected obligations | Addition of payments absent from management plans |
Adjustments may materially lower ratios. Prepare not only the balance sheet but also evidence of asset existence and cash conversion timing.
Why trends matter more than one reporting date
Month-end figures may be unusually strong because of one customer payment, a delayed supplier payment or lower stock. Banks compare periods to identify a sustainable pattern rather than a fortunate date.
| Change | Possible cause | Analyst’s question |
|---|---|---|
| Current ratio rises | Inventory or receivables accumulate | Are assets better or is cash merely tied up? |
| Quick ratio falls | Short-term debt increases | How will the company meet the next payment peak? |
| Cash rises before reporting | A one-off receipt or internal transfer | Is the balance operational and sustainable? |
| Payables fall | Accelerated supplier payments | Are new loans funding this? |
| Negative net working capital | Long-term assets funded by short-term obligations | Which sources cover the gap? |
For seasonal businesses, compare corresponding months across years and monthly averages. Otherwise, peak purchasing may appear as deterioration despite fitting the normal cycle.
Why good ratios do not replace a payment calendar
Ratios use balance sheet snapshots, not exact receipt and payment dates. A current ratio above one does not prevent a real shortfall if receivables arrive in 90 days but suppliers and the bank must be paid in 20.
Shows available resources
Records assets and liabilities at one date.
Shows cash timing
Identifies the weeks when funds arrive and leave.
Shows economics
Shows whether operations generate profit to restore liquidity.
Shows mandatory minimum payments
Adds principal, interest, leases and other financial payments.
Calculate monthly, or weekly where liquidity is tight. Negative figures identify shortfall dates and amounts.
Documents substantiating liquidity
| Document | What it substantiates |
|---|---|
| Balance sheet | Current asset and liability composition |
| Management balance sheet | The current position after the last official reporting date |
| Bank statements | Actual balances, turnover and account-to-account movements |
| Receivables breakdown | Customers, terms, arrears, concentration and expected receipts |
| Inventory breakdown | Composition, age, turnover and obsolete-stock share |
| Payables breakdown | Suppliers, due dates, arrears and agreements |
| Loan and leasing agreements | The complete financial obligation schedule |
| Tax statements | Current obligations, arrears and imminent payments |
| Payment calendar | Peak shortfall and cash remaining after mandatory payments |
| Contracts and orders | Grounds for future receipts and settlement dates |
Example: a ratio of 1.75 becomes 1.22
A company reports RUB 56 million of current assets and RUB 32 million of current liabilities, giving a current ratio of 1.75.
| Item | Reported balance | Bank adjustment | Adjusted balance |
|---|---|---|---|
| Cash | RUB 6 million | −RUB 1 million blocked | RUB 5 million |
| Receivables | RUB 24 million | −RUB 8 million overdue and related-party balances | RUB 16 million |
| Inventory | RUB 20 million | −RUB 6 million obsolete stock | RUB 14 million |
| Other assets | RUB 6 million | −RUB 2 million not readily realisable | RUB 4 million |
| Total | RUB 56 million | RUB −17 million | RUB 39 million |
The ratio remains positive, but financial headroom is much smaller than the original balance sheet suggests.
After excluding inventory and some other assets, the quick ratio is approximately 0.66: RUB 21 million of liquid resources against RUB 32 million of obligations. The payment calendar also reveals a RUB 4 million shortfall in the month taxes and an existing loan fall due.
Banks may lower a new limit, change drawdown maturity, request own funds or stage disbursement. Substantiated receivables recovery, supplier extensions and minimum cash balances after all debt payments strengthen the application.
Preparing liquidity analysis for the bank
Prepare the balance sheet and all breakdowns for the same day.
Identify unrestricted cash, liquid receivables and operating stock.
Add suppliers, taxes, payroll, loans and leases.
Exclude doubtful, related-party, illiquid and restricted assets.
Compare current, quick and cash ratios over time.
Assign dates to substantiated receipts and mandatory payments.
Test liquidity after the proposed interest and principal payments.
Disclose seasonality, one-off transactions and responses to shortfalls.
Mistakes that weaken liquidity assessment
Focusing on one ratio
A formal value does not show asset quality or payment dates.
Treating all receivables as liquid
Overdue and related-party debts may not become cash in time.
Not separating obsolete stock
Old inventory overstates coverage and conceals tied-up cash.
Forgetting imminent debt repayments
A long-term agreement also creates short-term payments.
Showing only month end
Reporting dates can conceal within-period shortfalls.
Ignoring the new loan
Check liquidity after adding the future schedule.
Need to check liquidity before applying?
NG Finance helps Russian LLCs and individual entrepreneurs understand their finances before raising funds, identify actual needs and select a suitable financing instrument.
Request an assessmentFrequently asked questions
Which liquidity ratio matters most?
There is no universal main ratio. Banks assess several ratios, asset quality, trends and a payment calendar.
Is a current ratio above one good?
It means current assets formally exceed current liabilities. The conclusion depends on asset composition and bank methodology.
Why does the bank exclude some receivables?
They may be overdue, disputed, owner-related or unsupported by agreements and payments.
Can liquidity be improved before applying?
Yes: recover receivables, reduce obsolete stock, negotiate extensions, refinance short debt and retain cash in the business.
Can a profitable business be illiquid?
Yes. Accounting profit may arise before cash arrives, while mandatory payments fall due earlier.
Why does the bank need statements?
They substantiate balances and actual cash movements absent from the balance sheet alone.
How much history should be shown?
At least 12 months of comparable data is usually useful; seasonal businesses should provide corresponding periods across years.
Does good liquidity guarantee approval?
No. Banks also assess profit, cash flow, debt commitments, credit history, owners and transaction parameters.
Conclusion
Strong liquidity means reliably converting assets into cash before payments fall due, not an attractive ratio on one date. Receivable and inventory quality, complete short-term debt, trends and a substantiated post-disbursement calendar matter.
Official materials
- Bank of Russia: guidance on Regulation No. 590-P and borrower financial assessment
- Russian Ministry of Finance: FSBU 4/2023 “Accounting (Financial) Statements”
- Russian Ministry of Finance: list of federal accounting standards
- Federal Tax Service of Russia: state accounting statements information resource
This material is for information and does not guarantee loan approval. Banks use their own models, benchmarks, adjustments and credit risk rules.