What is a Balance Sheet?

A balance sheet is a financial statement that shows what your business owns (assets), what it owes (liabilities), and the difference between them (equity) at a specific point in time. Lenders use it to assess your financial health and ability to repay a loan.

The Balance Sheet Equation

Every balance sheet follows a simple formula: Assets = Liabilities + Equity. This equation must always balance, which is why it is called a balance sheet.

If your business has $500,000 in assets and $300,000 in liabilities, your equity (or net worth) is $200,000.

Three Main Components

A balance sheet contains three sections:

• Assets: What your business owns — cash, accounts receivable, inventory, equipment, property, and other valuable items
• Liabilities: What your business owes — loans, accounts payable, credit card balances, and other debts
• Equity: The difference between assets and liabilities — this represents the owner's stake in the business

Current vs. Long-Term Items

Assets and liabilities are typically divided into current (due within one year) and long-term (due after one year). Current assets include cash and receivables. Long-term assets include equipment and real estate.

Lenders pay close attention to your current assets versus current liabilities to assess whether you can meet short-term obligations.

Why Lenders Review Balance Sheets

When you apply for a business loan, lenders examine your balance sheet to understand:

• How much cash and liquid assets you have available
• Your existing debt load and whether you can take on more
• The value of assets that could serve as collateral
• Your overall net worth and financial stability

Balance Sheet vs. Income Statement

While a balance sheet shows your financial position at a specific moment, an income statement (P&L) shows revenue and expenses over a period. Lenders typically review both documents together to get a complete picture of your business finances.