Reading a balance sheet in ten minutes
You don't need to be a CPA to get the important answers from a client's balance sheet. Eight questions, in order, tell a lender most of what it needs to know.
On Business Training · July 21, 2026 · 6 min read
Most of the businesses a factor or ABL lender funds are privately held, and private companies don’t publish their financial statements. What you get is what the client gives you: year-end statements, compiled, reviewed or audited by a CPA, and interim statements prepared in-house. The balance sheet is in all of them, and it answers a lender’s most important questions quickly, if you read it in the right order.
Here are eight questions that take about ten minutes.
1. How old is it, and who prepared it?
Check the date at the top: the balance sheet shows the position on one day. Year-end statements may arrive months after the year end, so treat them as history, not news. Then check the level of CPA involvement. An audit gives the most assurance, a review less, a compilation almost none. In-house interim statements have none at all. Read every figure with that in mind.
2. Is it worth anything?
Find total stockholders’ equity (or members’ equity for an LLC), which equals total assets minus total liabilities. If equity is negative, the company owes more than it owns. That doesn’t mean it fails tomorrow, but it does mean the owners have nothing left at risk and creditors are carrying the business.
3. What is it really worth?
Equity can flatter. Take out anything that wouldn’t raise cash if the business failed: intangible assets such as goodwill, and usually amounts due from officers, shareholders or affiliates. What remains is tangible net worth, the figure most lenders’ covenants are built on.
4. Can it pay its bills?
Compare current assets (cash, accounts receivable, inventory) with current liabilities. The difference is working capital, and the ratio between them is the current ratio. Negative working capital means the bills due within the year are bigger than what the business can turn into cash within the year. Many financed businesses run close to the line; what matters is whether it’s getting better or worse.
5. Do the receivables make sense?
Accounts receivable on the balance sheet should tie to the A/R aging for the same date. If you already fund the client, compare it with your own records. Compare it with sales too: receivables growing much faster than sales mean customers are paying later, or that some of the receivables aren’t collectible.
6. Who is owed money?
Read the current liabilities line by line. Three matter most:
- Accrued and payroll taxes. Unpaid payroll taxes are a serious warning sign. The IRS can hold the people responsible personally liable and file a federal tax lien, which can affect your collateral position.
- Line of credit and current portion of long-term debt. Other lenders, some of whom may hold liens on the same assets.
- Accounts payable. Vendors. Compare with purchases if you can; a rising figure means vendors are waiting longer to be paid.
7. What do the owners owe, or lend?
Look for due from shareholders or officer loans on the asset side, and due to shareholders or subordinated debt on the liability side. Owners who owe the company money have taken cash out of a business that may need it. Owners who lend the company money are supporting it, but may want it back at a bad moment unless the loan is subordinated to yours.
8. Which way is it going?
Put this year’s balance sheet beside last year’s, and the latest interim beside both. Is equity rising or falling? Working capital? Taxes owed? One balance sheet is a snapshot; two or three show direction, and direction is often the most useful thing a balance sheet tells you.
A balance sheet answers one question well: what would be left if the business stopped today. Read it with that in mind.
Two numbers to write down
Before you put the statements away, note tangible net worth and working capital, with the date. Most loan agreements set covenants on one or both, and the next set of statements will be judged against them. Writing them down now also means the next review starts with a comparison rather than a fresh read.
What it can’t tell you
A balance sheet says nothing about profit or cash flow. A profitable business can have a weak balance sheet, and a strong balance sheet can hide a business losing money every month. Ten minutes on the balance sheet tells you which questions to ask next: for the income statement, the statement of cash flows, the A/R and A/P agings, or a conversation with the owner.
It’s also worth checking the public record alongside the numbers: a UCC search for other secured lenders, and tax lien and litigation searches, show things a balance sheet may not.
Understanding Financial Statements works through each of these steps with a fictional client’s statements, from The Balance Sheet: What a Business Owns and The Balance Sheet: What a Business Owes to Profit Is Not Cash: the Working Capital Cycle and Six Simple Stages: a Structured Read of Any Financial Statements.