Why this matters to lenders
Lenders use cash-flow projections to answer a simple question: will you generate enough cash when it’s needed to make loan payments and keep the business (or household) operating? A projection that is realistic, well-documented, and conservative reduces perceived risk and speeds underwriting.
In my 15 years as a financial advisor, I’ve seen underwriters reject otherwise-strong applications because the cash-flow model missed timing issues (seasonal slumps) or left out loan-servicing costs. A robust projection tells the lender not just how much you expect to earn, but when that cash hits the bank.
Authoritative guidance: the IRS and Consumer Financial Protection Bureau recommend keeping accurate records and using clear financial forecasts when applying for credit (IRS; CFPB).
What lenders look for (clear checklist)
- Accuracy of historical inputs: lenders expect projections to tie back to recent bank statements, sales invoices, and tax returns. If projections wildly diverge from historical data, be ready to explain why.
- Realistic revenue assumptions: underwriters prefer conservative topline growth and explicit contingencies for lower sales.
- Expense completeness: include fixed costs, variable costs, loan payments, taxes, payroll, and one-time expenses.
- Timing and seasonality: monthly granularity is often required to reveal short-term gaps.
- Multiple scenarios: provide most-likely, conservative (downside), and upside cases.
- Cash buffers and covenants: show an emergency cushion and confirm you meet any loan covenants (debt-service coverage, minimum cash balances).
Step-by-step: Build the projection lenders want
- Gather source documents
- Last 12–24 months of bank statements, profit-and-loss (P&L) reports, A/R and A/P aging, and recent tax returns. Lenders often ask for 12 months; having 24 months strengthens trend analysis.
- Choose the projection period and cadence
- Short-term loans / working capital: monthly for 12–18 months.
- Term loans / expansion financing: monthly for 12 months and quarterly thereafter for up to 3 years.
Companies with irregular or seasonal cash flows may need a 24-month rolling forecast.
- Forecast cash inflows
- Start with strongly supported items: confirmed contracts, recurring sales, and historical averages.
- For new revenue streams, document assumptions: conversion rates, sales cycle length, pricing, and marketing spend.
- Separate cash receipts from accrual-based revenue — lenders care about cash that clears the bank.
- Forecast cash outflows
- List payroll, rent, utilities, inventory purchases, loan payments, taxes, and capital expenditures.
- Include timing for payments (due dates) and any supplier payment terms (Net 30, Net 60).
- Account for payroll taxes and employer-side benefits; these are commonly missed.
- Calculate net cash flow and opening/closing balances
- Monthly net cash flow = monthly cash inflows − monthly cash outflows.
- Track opening and closing cash balances to show how shortages or surpluses evolve.
- Run scenario analysis
- Most-likely: conservative but realistic assumptions tied to evidence.
- Downside: 10–30% lower revenue or delayed receipts; stress-test expenses to the extent possible.
- Upside: best-case sales mix or cost improvements.
Lenders will often review the downside scenario to judge resilience.
- Reconcile to financial statements
- Tie your projection to the latest financial statements and bank balances. Provide a short reconciliation table that explains major differences.
Example (concise monthly snapshot)
| Month | Cash Inflows | Cash Outflows | Net Cash Flow | End Cash Balance |
|---|---|---|---|---|
| Jan | $10,000 | $8,000 | $2,000 | $7,000 |
| Feb | $12,000 | $7,500 | $4,500 | $11,500 |
| Mar | $15,000 | $9,000 | $6,000 | $17,500 |
This simple table demonstrates the mechanics lenders expect: monthly granularity, both inflows and outflows, net result, and rolling ending balance.
Documents to attach (what to give the lender)
- Historical P&Ls and balance sheets (12–24 months).
- Bank statements (last 6–12 months).
- Accounts receivable aging and major customer contracts.
- Accounts payable schedule and vendor terms.
- Loan amortization schedule for existing debt.
- A one-page summary explaining key assumptions.
Providing a one-page narrative that calls out the three largest upside and downside risks is highly effective and often requested.
Tools and templates
- Spreadsheets: build a three-tab workbook — Inputs, Monthly Projection, Scenario Summary.
- Accounting software: QuickBooks and Xero can export reports that speed model building.
- For a lender-ready template see our cash-flow worksheet and forecast guides (internal resources below).
Useful internal links
- Our guide to building a cash flow statement: Cash flow statement (https://finhelp.io/glossary/cash-flow-statement/)
- How lenders use cash flow analysis to underwrite business loans: How Lenders Use Cash Flow Analysis (https://finhelp.io/glossary/how-lenders-use-cash-flow-analysis-to-underwrite-business-loans/)
- Specific loan-focused forecast template: Cash Flow Forecast for Loan Approval (https://finhelp.io/glossary/cash-flow-forecast-for-loan-approval/)
Common mistakes I see in practice
- Overlooking timing: projecting annual revenue growth without monthly detail masks seasonal shortfalls.
- Ignoring taxes and employer payroll costs: these can materially change cash needs.
- Using accrual revenue as cash: accounts receivable won’t pay the lender.
- No contingency: failing to model a 10–20% revenue drop is a red flag.
- Weak documentation: unsupported assumptions force lenders to discount the forecast.
In my experience, a clear reconciliation between your projection and your last tax return/P&L reduces back-and-forth with underwriters and shortens approval timelines.
How lenders test your assumptions
- Sensitivity checks: lenders reduce revenue and extend days-sales-outstanding to see if loan covenants still hold.
- Debt service coverage ratio (DSCR): many commercial lenders require a minimum DSCR (commonly between 1.1x–1.5x). Show calculations if relevant.
- Liquidity runway: lenders will ask how many months you can operate if revenues fall to the downside case.
When to hire a professional
If your forecast affects multi-million-dollar financing, complex inventory cycles, or material seasonality, engage a CPA or financial advisor. They can produce audited schedules, stress-tested scenarios, and a lender-facing memo. In my practice, clients who bring a third-party-reviewed projection to the lender close faster and with fewer covenants.
Frequently asked questions
Q: How far ahead should I project?
A: Provide at least 12 months of monthly detail. For term loans, extend to 24–36 months with quarterly summaries after year one.
Q: Should I include owner draws or personal expenses?
A: Yes — if you’re a pass-through business or sole proprietor, include owner draws because they reduce cash available for loan servicing.
Q: Can I use software exports instead of building a spreadsheet?
A: Yes. Exported reports from QuickBooks, Xero, or your bank are acceptable if they clearly show receipts and disbursements and you add explanatory notes.
Final checklist before submission
- Tie projections to historicals and bank balances.
- Provide most-likely and downside scenarios.
- Include a one-page assumptions memo and reconciliation.
- Attach supporting documents (bank statements, P&L, A/R, A/P).
- Keep the model transparent: label inputs, formulas, and assumptions.
Sources and further reading
- Internal resources on cash-flow tools and forecasting: see the linked guides above.
- IRS — Small Business and Self-Employed Tax Center: https://www.irs.gov/businesses/small-businesses-self-employed
- Consumer Financial Protection Bureau — guidance on small business financing and loan shopping: https://www.consumerfinance.gov/
Professional disclaimer
This article is educational and general in nature. It does not constitute individualized financial, tax, or legal advice. Consult a CPA, attorney, or qualified financial advisor for guidance tailored to your situation.
