Financial Information- The Backbone of a Loan Request
The company financial section of your loan package is the most important part. Generally, the lender will look at this part before anything else and they often make judgments that can negatively impact the chance of getting your loan even moved to the Credit Administrator that actually makes the lending decisions.
The company financials required by any bank include the following:
1) A minimum of three years of company tax returns, along with any CPA statements that the company has available (these include compiled, reviewed, or audited statements). I recommend five years since that will show what occurred before the recession. If there are multiple borrowers, each will need to include financial statements.
2) If the company doesn’t have CPA prepared statements the bank will want you to include the balance sheet, income statement, and cash flow statement from your Quickbooks (or similar) accounting system.
3) The latest year-to-date, quarter-end statement for the current year and the same quarter-end for the prior year. If you have a particularly seasonal company I would also include the current and prior year’s other quarters to show how the company fluctuates over the year. So for example, if you are applying in October 2010, you would want to give the bank the year-to-date for 3/31, 6/30, and 9/30 for both 2010 and 2009.
4) Accounts receivable, accounts payable, and inventory reports from your financial accounting system for the same financial year end periods, and the latest interim. The aging will include current, 30, 60, and 90 days past due. If the company doesn’t have these (for example its accounting is based on cash) then this report is not needed.
5) If your loan request is to purchase something (usually equipment, or another company, or for the start up of a company or division) and the increased revenue generated will be required to help cover the debt service, then a very important piece of your financial information is projections on how the increased cash flow will support the payments on the loan. The number of years projected should be the same as the number of years of the loan. If you are unsure how long the loan might need to be, a general rule of thumb is 5 for equipment 7-10 for acquisition, 10 or more for real estate (usually with an amortization of 20-25 years).
I recommend a one or two year projection these days no matter what the loan is used for due to the uncertainty of the economy. We’ll discuss how to make assumptions for projections another time- its an art of its own!
There are a number of other specialty financial forms that you can include in the package of financial information. I recommend keeping it simple rather than including a lot of esoteric information. Sometimes adding too much information can backfire, creating confusion for the lender rather than comfort.
Now that you have put together all this financial information, what is the lender going to do with it? My next post will discuss some of the financial ratios that the lender will generate from your statements and how the results will make or break your loan request.
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