My last post introduced you to the documentation type items that lenders look for when considering a business loan. This post and the one following will provide more detailed information about each one.
Today we will discuss in detail a lender’s need for the following:
Complete business tax returns for last 2 or 3 years.
End of year business financial statements for last 2 or 3 years.
Interim financial statement dated less than 90 days old.
Current accounts receivable aging.
Current accounts payable aging.
Complete customer list
Business Tax Returns: Lenders generally want to see your company’s last two or three years of tax returns. Be prepared to provide the entire return, not just the first two pages. Some lenders will ask you to sign an IRS 8821 form which will allow them to receive copies of the actual filed returns or tax transcripts. The reason for this is to ensure what you are providing the bank matches what you provide the IRS. If you haven’t filed a return for a particular year, go back one previous year and provide a copy of the extension form showing you have applied for an extension. Lenders like to use tax returns to analyze your business liquidity, performance, and trends. Tax Returns are considered more reliable to lenders than company prepared financial statements.
End of Year (EOY) Business Financials: While lenders like to use your tax return for analysis, they still will want to see your last 2 or 3 year-end financial statements. While the tax return is standardized for all taxpayers, your company’s EOY financial statements provide a more detailed look at your business. Ideally, you as management understand how to read and use these financial statements. Many businesses try to have an EOY financial statement available within 30-45 days after year end close, but most lenders consider 90 days acceptable.
Interim Financial Statements: Lenders want to see the most current snapshot of your business performance and the interim financial statement shows this. The most ideal standard is to have a monthly financial statement prepared by the 15th of the month following a month end close. When you show a lender you place this much emphasis on your business, they will be more inclined to consider you a lower risk. Again, this assumes you as management use these month end statements to monitor progress and make necessary changes as reflected in the financials. An interim financial statement is considered too old when it is over 90 days old.
Current A/R, A/P aging and Customer List: Many lenders like to see your A/P and A/R aging dated and footing to your interim financial statement, however, if your interim financial statement is more than a month old, they will want to see a more current picture of these two critical business reports. It goes without saying that you should do everything you can to clean up both collections and payables before you apply for a loan. Old A/R and Old A/P are big red flags for a lender and often will result in turn down. The customer list is important to the lender because they want to examine potential concentration of credit to large customers, They might even want to do some credit investigation on your top customers to insure themselves that your business is making good credit decisions.
On my next post I will continue discussing in detail each of the items that are important to lenders.
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