When applying for a small business loan, your tax returns will ideally demonstrate your business’s financial position. Sometimes, your business may reflect a loss on the previous year’s tax return. In these cases, it’s possible that a lender may make an exception – if your business’s interim financial statements meet your lender’s criteria and show breakeven or positive cash flow.
Here, you’ll learn why lenders request tax returns and interim financial statements as the basis for reviewing your business financial position, as well as why interim financial statements may be enough for loan approval when profitability is not on the business tax return.
The goal is to help you understand what lenders need and how to prepare better interim financial statements to build your case for loan approval if your business tax returns don’t demonstrate available cash flow.
Why do lenders request your tax returns?
Lenders prefer to base their loan decisions on your business’s previous year of tax returns because the information that a business reports to the government tends to be more accurate than what’s reflected on your business’s interim profit-and-loss (P&L) statement and balance sheet. For example, while your interim financial statements may demonstrate a healthy net profit, they may not show all of the business expenses, whereas tax returns are typically more accurate.
What if you don’t have tax returns available?
There are times when your business’s tax returns may not represent the whole financial picture, including when your business’s most recent tax returns show losses, making loan approval decisions difficult. In this case, lenders have the option to approve a loan application based on your interim financial statements. However, it’s critical that these documents are accurate and complete to get an exception approval.
How interim financial statements can support your loan application
Your interim financial statements, specifically your interim P&L and balance sheet, are two essential documents that most lenders will request when reviewing your small business loan application. However, not all interim financial statements are created equal. While many are accurate and complete, there are also many that may not reflect the entire picture of your business’s financial position.
Here’s how to ensure that your interim financial statements are as accurate as possible:
- Find a trustworthy and experienced Certified Public Accountant (CPA): If you don’t already have a CPA, ask other small business owners in your industry or area for recommendations.
- Support your CPA’s work: You should give your CPA all the necessary information. By doing so, you help your CPA create complete and valid financial statements that a lender can then use to potentially approve your loan.
- Stay in contact with your CPA: After the interim financials are prepared, keep in touch with your CPA so that those documents stay updated – and remember to include updated versions in any loan applications.
If you find that you’re missing information that should be given to your CPA or you have other concerns about your business financials or tax filings, talk to your CPA. Most small business owners aren’t financial or tax gurus, and if you’re not, it’s important to know that the sooner you get your books in order and your taxes updated, the better. Your CPA can help you get on track.
How to help your CPA create accurate financials
No one knows your business better than you, so it’s up to you to ensure you give the most accurate information and numbers when reporting your business’s income and expenses. Include all business debts, liabilities, and other expenses your business received in the current year. If you leave out any of this essential information, you risk having a lender question the validity of the information you give in your interim financial statements.
It’s also important to ensure that your CPA knows if and when you’ll be applying for a small business loan so that they can appropriately advise your tax and financial strategy. For example, while you’re entitled to take a salary or distribution from the business, you and your CPA should be careful not to take out too large of a salary or distribution. This could cancel out a positive cash flow on your interim financials and potentially cause your loan application to be denied.
What if your loan application is denied, despite showing profitability?
When interim financial statements are used as financial documentation and show a net profit, it may be a surprise if your loan application is still denied.
While that’s never the response you want to hear, if a lender turned down your application, remember that a ‘no’ isn’t forever – it simply means ‘no, for now.’ That’s because responsible lenders want to help you use the loan to grow your business, hire more people, and have a greater impact on the community your business serves.
If your application is turned down, it means that your lender has reason to believe that you may be unable to repay the loan as agreed. Ask your lender for feedback about why your application was denied and what you can do going forward to strengthen your position. Then, follow their advice – including filing your tax returns on time and keeping accurate and complete financial records. Within months, you’ll often be back on track to ‘yes.’
If you’re in this situation, talk to Pursuit
While approving a loan based on interim financials is not ideal for a lender, it’s not impossible. If you’re in this position, work with a CPA to put together accurate and trustworthy interim financial statements. With these in hand, you may be better positioned for an exception approval, which will secure your business the funds it needs to grow.
And when you’re ready, Pursuit can help. Pursuit is a leading small business lender that supports small business owners across New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington. We offer more than 15 loans and a line of credit, along with insightful resources and business advisory services for all small business owners.
Contact us to learn more.
