Small Biz Funding and Small business loans and Small Business

WOJTOWICZ: Lenders need financial statements to protect investment

August 27, 2012

Q: I have my accountant prepare my business tax returns every year. Recently, I applied for a loan for working capital and to fund an addition to the building, but my banker asked me for a current financial statement. I usually don’t have one prepared, so this will cost additional money—as well as time. Why is the bank forcing me to incur this additional expense?

A: It sounds as if this is a new situation for you. If so, I am surprised; lenders often want to see the latest financial information they can get regarding a potential borrower’s business.

There are several reasons for this, but they boil down to one basic fact: The bank needs to know how your business is doing right now (usually the most recent 30 or 60 days), rather than rely on your current year’s tax return that may have aged several months.

The reporting on your tax return also may be different than the internal statements that you would have prepared. For example, you might be writing off some assets faster for tax purposes. The bank also wants to understand the cash cycles of your business, including how fast your customers pay you and what type of account-payable balances you carry. .

So it’s not unusual for a potential lender to want as much information as you can give, and even more. The bank also wants to be sure you are on top of all of the activities of the business. You can’t judge how well you are managing the business if you don’t have this information available for your own use. This should be a management tool that you want for yourself, not just to support your loan application.

Please keep in mind that an interim financial statement is in your best interest. If you do not have a current statement, your bank may not believe you when you try to persuade them to invest in your business.

Notice that I said “invest.” That’s really what a bank does: It supports business plans with the expectation that it will make money (interest on the loan) when you repay. Assuming your interim statement supports the story on your loan application, it should reassure the bank and help your lender say “yes” to your loan.

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Wojtowicz is president of Cambridge Capital Management Corp.

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