Whether you're applying for a mortgage, refinancing, or seeking business financing, lenders rely on your financial statements to understand the health of your business. Here's a friendly breakdown of what they look at and why it matters.

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1. The Three Pillars of Financial Statements

Every business's financial picture is built on three main documents. Think of them as your company's report card, snapshot, and cash tracker.

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A. Income Statement (Profit & Loss / P&L)

What it is: A report card covering a specific period (like your fiscal year).

What it shows: Your business earnings: Revenue – Expenses = Net Income

Why it matters: It shows whether your business is actually making money or just spending it.

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B. Balance Sheet

What it is: A snapshot of your business at a single moment in time.

What it shows:

• What you own (Assets)
• What you owe (Liabilities)
• What's left over (Equity)

The key formula:

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C. Cash Flow Statement

What it is: A tracker that shows how cash moves in and out of your business.

What it shows: It separates paper profit from actual cash in the bank. For example: You may have a $10,000 sale on credit—but until the client pays, that money can't help you pay your mortgage or payroll.

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2. Levels of "Assurance" — How Much Lenders Trust Your Numbers

Not all financial statements carry the same level of credibility. In Canada, accountants can prepare them with different degrees of verification:

1. Notice to Reader (Compilation)

• Accountant formats your data—no verification.
• Suitable for small mortgages or simple businesses.

2. Review Engagement

• Accountant performs tests and analysis to ensure numbers are reasonable.
• Often required for loans over $500,000.

3. Audited Financials

• The highest level of verification.
• Accountant reviews major transactions in detail.
• Usually used by large companies or publicly traded corporations.

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3. Why Lenders Ask for Your Financials

Lenders don't just review your profit. They analyze specific ratios to see how stable and safe your business is.

Key things they look for:

✔ Debt-to-Equity Ratio

Are you over-leveraged, or have you invested healthy capital in your business?

✔ Current Ratio

Do you have enough short-term assets (cash, receivables) to comfortably pay your upcoming bills?

✔ Add-Backs

Lenders look for one-time or non-recurring expenses (e.g., buying new equipment, one-time legal fees). These can often be added back to your income to help you qualify for a higher mortgage.

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4. The 20% Down Payment Threshold

This is the biggest dividing line in the mortgage world.

🔹 High-Ratio Mortgage

Down payment between 5% and 19.99%

🔹 Conventional Mortgage

Down payment of 20% or more

Your down payment determines whether your mortgage needs insurance and what rules apply to you.

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5. Quick Comparison: High-Ratio vs. Conventional