If you’ve ever applied for SME business funding, you know that lenders will ask you to submit your bank account statements dating back at least 12 months when you submit your loan application. But do you know why they ask for these statements? It’s to check how much money you have in your bank accounts at any given time, also known as your average bank account balance!
Here’s why your average bank account balance is significant when you apply for SME business funding.
What is my average bank account balance?
Your Monthly Average Balance (MAB), also commonly known as your minimum bank account balance, is the minimum amount of money you always have in your bank account. Your average balance is a product of who you bank with, what type of account you have, and the features of the bank account.
How do I calculate my average bank account balance?
Your average balance is the average of your balance at the end of each day in a given month. To calculate it, add up all your daily account balances in a month and divide it by the number of days in a month.
Let’s take the example of a month that has 31 days. The numbers below are the account balance every day at closing time.
| Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | Day 6 | |
| 10,000 | 13,000 | 16,000 | 13,000 | 13,000 | 12,000 | |
| Day 7 | Day 8 | Day 9 | Day 10 | Day 11 | Day 12 | Day 13 |
| 11,000 | 14,000 | 17,000 | 12,000 | 18,000 | 20,000 | 15,000 |
| Day 14 | Day 15 | Day 16 | Day 17 | Day 18 | Day 19 | Day 20 |
| 15,000 | 15,000 | 10,000 | 11,000 | 16,000 | 17,000 | 16,500 |
| Day 21 | Day 22 | Day 23 | Day 24 | Day 25 | Day 26 | Day 27 |
| 18,000 | 19,000 | 19,000 | 13,000 | 10,000 | 10,000 | 15,000 |
| Day 28 | Day 29 | Day 30 | Day 31 | |||
| 12,000 | 16,000 | 14,000 | 12,000 |
After we add up all the end-of-day balances for the account we get 4,42,500.
Then we divide this by 31 and we get 14,274.19. Therefore, the account’s average bank account balance or MAB is Rs. 14,274.19.
Why is my average bank account balance important when I apply for SME business funding?
Your average bank balance is one of the determining factors of your eligibility to get SME business funding, and the loan size lenders are willing to lend to you.
Your MAB develops confidence in the lender that you are a responsible businessman who strategically maintains their business financials. This makes you a comparatively low-risk investment for them.
Based on your average bank account balance, lenders can determine what EMI value you will be able to repay every month if they decide to give you business funding. The higher your average balance, the more your capacity to repay. You would qualify for a larger ticket size loan amount at a lower interest rate and better loan terms because lenders know you’ll be able to meet your EMI obligations and simultaneously fund your day-to-day business operations.
Find out how lenders determine what interest rate to offer you for SME business funding.
Besides this, maintaining a certain average bank balance ensures that:
- The cheques that you write from that account will not bounce because you have enough money in your account to clear the payment.
- Your EMI payments will not bounce because you have enough money in the account, so your Electronic Clearing Service (ESC) pull will not fail. This will help you maintain a good credit score and improve your creditworthiness.
- It helps you avoid penalties like cheque bounce fees, EMI bounce charges, and the penalty your banker will charge you for not maintain the minimum bank balance required in your account to enjoy certain features of that account.
Is there a recommended average bank account balance I should maintain in my account?
No, no hard and fast rule determines what an ideal average bank account balance is.
Since your minimum bank account balance is set by your banker, it differs from one bank to another. It also depends on the type of bank account you have and the features of that account. This value may be different for Public and Private sector banks and whether your bank account is based in a metro, urban, semi-urban, or rural area. When you open the bank account, your banker would have provided you with this information, and if your account balance falls under that amount, you would have also been charged the penalty fee.
When you apply for SME business funding with CreditEnable, we advise our SME customers to maintain an average bank account balance that is higher than their EMI value. This is so that lenders know you have enough money to fulfil your EMI obligations and fund your business operations, making you a less risky borrower and improving your creditworthiness with lenders.
Our 25+ lender partners require bank statements for the past 12 months to make a lending decision. In reviewing your bank statements, lenders establish your spending patterns, expenses, and average account balance. A high number of penalty charges, whether they’re for a bounced cheque, an EMI bounce, or a minimum balance fee, indicates to them that your finances may not be stable yet, or that your business is in a cash crunch. So, it is important to plan for a business loan. You need to have stable cash flows in and out of your business, and you need to maintain the minimum balance set by your banker.
Here are other ways you can prepare your business for SME business funding.
Start your SME loan application today.