When seeking a business loan, one of the best things you can do to improve your chances of securing credit is ensuring that your financial statements are in order and presented in a way that makes your company look good. Financial statements are how banks evaluate a company’s health and manage their risk when providing loans. Unfortunately, many business owners sabotage their credit applications with sloppy financial statements.
Imagine that your business generates $5 million in revenue, yet the financial statements you submit with your loan application are riddled with mistakes. The message you give to the bank is “I’m not worthy of a loan.” From the bank’s perspective, if you can’t get your financial reports in order – a relatively simple task -- why should they trust you to be a good steward of their money?
Your financial statements will be scrutinized by underwriters – trained financial professionals whose gift is sniffing out mistakes and warning signs of unreliable borrowers. According to Alex Tekouras, Savoy’s CRE Lending Manager, most delays in approval are not within the bank’s process but are due to borrower’s not being fully prepared. Your financial statements should look as if they were prepared by a professional. Better yet, if you don’t have the internal resources, hire a professional who understands what a balance sheet and profit and loss statement (P&L) should look like and can format yours accordingly. For example, your financials should have four components: assets, liabilities, income, and expenses. They should show your revenue and direct costs associated with your revenue (i.e., cost of goods sold and cost of services sold). They should reveal the difference between gross and net margins.
Gather Three Years of Historical Data
Lenders will want to see at least three years of historical financial data when evaluating your loan application. This provides valuable insight into trends and an understanding of what is happening in your business. Understanding trends in your business helps bankers assess the potential risk they may be taking. For example, historical data can reveal if your revenue is going up or down (that is, if your business is growing or declining), if your cost of revenue increasing at a rate faster than revenue; if your operating expenses are reducing or exploding. In short, what the trends are in your business.
Don’t Forget Forecasting
In additional to historical data, you will also want provide financial forecasts for the next two or three years. Lenders want to know how you intend to use the proceeds of the loan and how that will impact your business operations. Your forecasts should present a picture of your intentions for the business and should be reasonable and based on clearly defined assumptions. Are you starting a new division, are you increasing staff and revenues, be clear about why you need the funds and what benefits having those funds are expected to achieve.
Impress your Potential Lender
Lenders want to know and have confidence in the business owners they are lending to. “ At Savoy, we want to develop a long-term relationship with all of our customers. So, our analysis goes beyond the numbers. We want to know about our clients’ experiences and their business plans.” says Alex. Typically, all lenders want to build a long-term relationship, and so your story matters. The story you tell determines the funds you may get. You need to tell a compelling story and back it up with financials- both historical and forecasted. Does your business show positive trends, such as increasing revenue and market share? Show how you’re enhancing these trends. Does your business show negative trends, such as declining profits? Show how you’re interrupting the trends.
For example, if your financials show that your revenue is falling, your story needs to explain what happened. Show that you understand how you got into this situation, what you did wrong, and the role the marketplace played. Then show what you’re doing to interrupt the trend, the results you’re seeing, and the roles that all the members of your team are playing. Explain how much money you need to keep moving forward – and how it will be invested wisely into your business. Finally, your story should explain how you’ll get their money back to them—and how you (or someone else with deep pockets) is there to guarantee the loan as a backup.
Your clear-headed, objective analysis of your past, a realistic forecast, and a detailed demonstration that you know how to use the borrowed funds wisely is what gives a bank confidence in you and your ability to repay a loan.
Present a Complete Picture
Financial statements reveal important information to help lenders evaluate the potential risk they will assume if they lend your company money. But financial statements are only part of the equation. Banks will evaluate your financials, your team and people, and your plan. Your story will play a role – but only if your financials are in order and structured to support your story and your credibility.
Marilyn J. Magett, CRS Financial Management Solutions is an independent CFO who has decades of experience helping small business owners attract funding needed to grow their businesses.