Does your business need a loan? Before contacting your bank, it’s important to gather all relevant financial information to prove your business is creditworthy. By anticipating information requests, you can expedite the application process and improve your chances of approval.
Lenders love GAAP
U.S. Generally Accepted Accounting Principles (GAAP) is a collection of specific accounting rules and principles that’s regularly updated by the Financial Accounting Standards Board. Lenders generally prefer GAAP financial statements over those prepared under special purpose frameworks, such as cash- or tax-basis financial statements, because GAAP financials tend to be more transparent and consistent from one business (or reporting period) to the next.
Businesses that follow GAAP use accrual-basis reporting. That is, they record sales as earned and expenses when incurred. Under GAAP, the balance sheet also includes receivables, payables, prepaid assets and accrued expenses. These accounts generally are created only when a business uses accrual accounting.
Dig deeper with financial benchmarks
During the loan application process, lenders may also compute various financial ratios and then compare them over time or against competitors. Common benchmarks used in the underwriting process include:
- Profit margin,
- Average days in inventory,
- Average days in receivables,
- Average days in payables,
- Current assets to current liabilities,
- Debt-to-equity ratio, and
- Interest coverage.
Beyond the numbers
Your lenders also may want to evaluate the operations of your business. This meeting provides opportunities to perform the following due diligence procedures:
- Touring the facilities,
- Meeting with members of your management team,
- Collecting additional information, such as copies of marketing materials, pricing lists and key contracts, and
- Discussing benchmarking anomalies and major discrepancies between the company’s GAAP financial statements and tax returns.
Also be prepared to explain how you intend to use the loan proceeds for future business operations. For example, you might want to expand your facilities, hire more employees or buy equipment. Or maybe you want a cushion to fund occasional working capital shortfalls.
Ready, set, apply
Need help securing a commercial loan for your business? We can be a valuable resource during the application process.
©2022 Thomson Reuters