You’re not an accountant. You devote your time to making your customers happy and growing your business, not preparing financial statements. But, when it’s time to start looking for a loan, you need to consider how you’ll show the bank you can pay it back. Mainly, you should think about what types of financial statements you’ll need to prepare for a small business loan.
Generally, banks will want to see accountant-reviewed financial statements for the last three years of operation. They’ll also ask for a current balance sheet and an interim income statement. A personal financial statement is needed if you’ll be a guarantor. You may also need to provide accounts receivable and accounts payable aging reports.
Let’s take a closer look at the financial statements you’ll need to have prepared before you go to the bank for a loan.
Annual Financial Statements
One of the best ways you can show that your business can pay back a loan is with historical financial statements. These include a balance sheet, income statement (sometimes called a profit and loss statement), and a cash flow statement.
Banks like to see three years of annual statements. They allow a banker to see how steady and reliable your business’s performance has been. Historical performance is one of the best indicators of how a company will perform in the near future.
You should always have a certified public accountant (CPA) prepare your annual financial statements. A good accountant will also be a trusted business advisor that’ll prevent you from making costly mistakes in the future.
Beware, though, that not all financial statements are equal in the eyes of the bank. There are three basic types of financial statements an accountant can prepare. These are compiled, reviewed, and audited statements.
Compiled Statements
Compiled financial statements are the least desired of all of the accountant prepared statements. The accountant is not providing any assurance to the banker that they’ve verified the accuracy of the information in the statements.
The accountant is merely taking the information you provide and making sure there are no material misstatements. Some lenders may accept these types of statements if the lending relationship is already established, the loan amount is small, or if the borrower has a lot of collateral to pledge.
Reviewed Statements
Accountant reviewed statements are the next step up from compiled statements. For these, the accountant does some analysis to get some assurance about the accuracy of the information.
The accountant also learns a bit about the accounting practices of your industry and your company so that they can identify where material misstatements might arise. The account will issue a report that says that they’ve reviewed the statements. The report will say if they’ve found any issues to address.
These are the most common types of statements required by lenders. They provide a basic level of assurance to the lender that they can be trusted.
Audited Statements
An audit is the gold standard of the accountant prepared financial statements. These also carry the highest price tag. Audited statements provide the most significant level of assurance that your numbers are accurate.
The accountant will look to prove, with evidence, that your financial statements are reliable and that fraud is not taking place. The CPA will inspect accounts, reach out to vendors, and analyze your processes during the audit. In the end, the accountant will issue an opinion about the accuracy of the statements and any weaknesses they found.
If you run a large company or are seeking a large and complex loan, you should consider getting audited statements.
Interim Financial Statements
If you’re looking for a loan and the first quarter has passed, the bank will most likely ask for interim statements. Usually, the bank will accept internally prepared statements that you can generate with your accounting software. The main items you’ll need to submit are an income statement, current balance sheet, and accounts receivable and payable aging reports.
These statements should include information through the nearest completed fiscal quarter. They will allow the banker to see if there have been any substantial changes to your company’s performance recently. Be sure to point out the seasonality or cyclical nature of your business if it affects your interim statements.
The interim balance sheet will provide valuable information about your company’s solvency. Your assets and liabilities may have changed between your fiscal year-end and the time you ask for a loan. Be sure to clean up your accounts so that there are no negative amounts or irregularities. These will jump out at the banker and make them question your accounting processes.
Receivable and payable aging reports will show a banker how fast you’re getting paid and paying your suppliers. Always try to collect and pay your accounts as quickly as possible. If you have a handful of accounts that are past 90 days, think about providing some information about them, such as why there’s a delay and when you expect clients to pay you.
Personal Financial Statements
When you’re getting a loan from a traditional bank, they’ll probably ask you to provide your personal guarantee. This means that, if your business can’t repay the loan, the bank will look to you personally to repay it.
Because of this, a bank will want to see what your personal financial situation looks like. To do that, the bank will ask you to provide a personal financial statement and your most recent personal tax return. Between these two documents, the bank can determine your income, liquidity, and personal net worth.
Most banks will want you to fill out their own personal financial statement form. These are usually pretty straightforward. They’ll ask you to list your assets and liabilities. You’ll probably spend more time gathering information than filling out the form. The bank will also want you to sign it.
They might ask you to verify your liquid assets, too. This is especially true if your liquid assets are enough to provide some comfort to the bank. Your most recent bank and brokerage statements would serve as proof.
Final Considerations
Now you know what financial statements you’ll need when you apply for your loan. It’s essential that you have your business statements prepared before meeting with the banker. A banker will be suspicious if you don’t have these documents readily available.
Remember that you want to show the banker that you manage your company’s finances professionally. Having accountant reviewed statements, clean interim statements, and accurate aging reports will show that you take your business’s finances seriously.
You can assure the bank that you’re a worthy borrower by taking the time and spending the money to prepare your financial statements. A little preparation before looking for financing might make the difference between getting a yes or getting denied.
If you have any questions about retail or commercial banking, send me an email at david@thehelpfulbanker.com. To stay up to date on new blog posts, subscribe to The Helpful Banker below.
