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Presenting Small Business Financial Statements to a Lender

What you'll need to have in hand when you apply for a small business loan


Business owners who present their financial statements to a lender will usually present a full set of financial statements to the lender. These include a recent balance sheet, a profit and loss statement, a statement of cash flows, and notes to the financial statements. These statements, prepared in accordance with generally accepted accounting principles, usually give a realistic picture of the business activity for the period in question.

The balance sheet will show the assets, liabilities and equity of the company. Make sure you show current assets and current liabilities separately from long-term assets and long-term liabilities. Also make sure the equity section is appropriate for the form of business entity you have, such as sole proprietorship, limited liability company or corporation.

The profit and loss statement could cover a year or part of a year, and could be presented in comparison to the prior year or period. This would be useful if the trend from last year to this year is favorable.

The statement of cash flows can be prepared using either a direct or an indirect method, and there are a variety of acceptable methods to consider in the presentation. The more detail, the better picture the reader of the statements gets. However, you must weigh the additional costs of preparing additional information to the benefits of having that information available to the reader.

The notes to financial statements cover the significant accounting policies employed in preparation of the financial statements, as well as other required disclosures to the statements. The degree of detail presented in the footnotes may lead the reader to seek additional information or enough detail may be presented to negate the need for additional inquiries.

An alternative to the full set of financial statements is one that could be on a tax or a cash basis of accounting. The statement of cash flows would then be eliminated. It also might be easier to assemble the data for a cash or tax basis financial statement if the books are kept that way.

The financial statements can also be prepared while omitting some or all of the footnotes making up the disclosures required under the accounting basis employed. An interim financial statement that omits certain disclosures may include those disclosures in the annual financial statement.

Consider the use of supplementary of additional information to support the basic financial statements. These could include a detailed schedule of gross profit by product line, by job, or other means. Sometimes the lender will look for a separate aged schedule of receivables or payables to support the balance sheet item.

Look at the degree of precision needed in each line item. Small amounts can usually be combined to improve upon the look of the statements without giving up significant detail.

If your loan requires that your business have certain financial characteristics, such as positive net worth, working capital or specified amounts calculated via use of financial ratios, make sure that you understand how the lender calculates them and be sure that your statements demonstrate that your business is achieving those aims. If you have not met those criteria, be prepared to discuss them with the lender. You might obtain a waiver of the loan covenants under the particular circumstances.

If a lender requires an independent Certified Public Accountant to be associated with your financial statements, consider whether the statements need to be compiled, reviewed or audited. Also, consider how well your records are maintained and what efforts you can make to reduce costs associated with presenting the financial statements to the lender.

Your financial statements give the reader a picture of your business finances at a given point in time. Consider some of the approaches outlined above to make this process favorable for your business.
Joseph L. Rosenberg is a Certified Public Accountant in Florham Park, NJ, specializing in working with entrepreneurs and small business owners. He can be reached at (973) 443-4332 or josephlrosenbergcpa@consultant.com. This article originally appeared at the New Jersey Small Business Development Center website and the Caribbean American & Hispanic Business Journal.

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