If you plan to apply for a small business loan in the months ahead, it’s important to know that delaying your tax filings, even with an Internal Revenue Service (IRS)-approved extension, could impact your loan approval. In this overview, you’ll learn why filing taxes is important for your personal and business returns, how an extension could impact your loan decision, and when your lender could grant exception approval.
Why should you file your taxes?
During tax season, you may be busy running your business and may not have enough time to pull your tax information together before the deadline. You may even decide to apply for a tax extension for your business or personal tax filings. While this is absolutely legal and often appropriate, there are times when this delay could present a challenge. Specifically, if you plan to apply for small business financing soon, you’ll need your most recent tax returns available.
This is because most small business lenders, including banks, credit unions, and Community Development Financial Institutions (CDFIs), require tax returns before approving most small business loans. Given this, if your tax filings are delayed by several months, you may be unable to submit a complete application with tax returns. This could delay financing you may be counting on to grow your business.
Remember that depending on the type of business entity you have, your business and personal tax filings may be the same. For example, sole proprietors and most simple partnerships and limited liability companies (LLCs) business filings are a part of your personal tax return. In these cases, delaying your personal returns has the same effect on your business return.
What about year-end financial statements instead?
Although your business’s year-end financial statements may be as accurate and error-free as possible, nuances between your financial statements and tax filings make tax returns the most accurate reflection of your business’s financial position.
For example, year-end financial statements may not include the actual final figures for the business, or there may be discrepancies between financial statements and tax returns due to cash- or accrual-accounting methods or tax codes. As a result, financial statements are often not as reliable as tax returns.
That doesn’t mean that your lender doubts the accuracy of your financial statements, your ability to create them, or your intent to provide correct information. It’s simply that, from your lender’s perspective, even seemingly slight differences between your tax returns and your business’s year-end financial statements can tell a lot about your business’s financial position and your ability to repay a loan.
This is why most lenders prefer tax returns over year-end financial statements.
When financial statements may be acceptable
There are some situations where your lender may consider using year-end financial statements instead of filed tax returns, including:
- If your business’s year-end financial statements are prepared by a certified public accountant (CPA) or accountant, your lender may consider them more reliable than those generated through your in-house bookkeeping software. That’s because accounting professionals will know what to look for and how to address discrepancies, errors, and code requirements.
- If your business has reported consistent operations over multiple years, your lender may accept loan applications and approve requests using your business’s internally prepared year-end financials. However, if the most recent year shows a significant increase in revenues or profit and your lender needs this as a basis of approval, they may require accountant-prepared financial statements or tax returns.
If you’re uncertain about whether your business’s circumstances would allow for a lender’s approval without the submission of your most recent tax returns, you should talk to your lender for guidance.
What to do if you’ve already filed for an extension
If your business plans for the coming months include applying for a loan, but you’ve already filed for a tax extension, don’t panic.
While filing for a tax extension typically means you can have up to another six months to submit your returns, you can always file them sooner. For example, if your tax deadline would have been April 15, and your extension permits you to file by October 15, you can still file anytime during those dates.
So, if applying for a small business loan is on your radar, talk to your accountant or financial team to determine how soon your filings can be completed. If they can be submitted by the end of June, for example, instead of in October, then you can plan your business loan application around that date.
Pursuit loans support financing and much more
When applying for a small business loan, you want your lender to have confidence in your business and your ability to repay your loan as agreed. That’s why filing taxes is important – it helps your lender gain a clear understanding of your business’s financial health.
When your tax returns are complete and you’re ready to apply for financing, Pursuit can help.
We offer more than 15 loans and a line of credit for small businesses in New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington. In addition, Pursuit’s Business Advisory Services offers expert consulting services in financial management, human resources, marketing, and more to Pursuit borrowers at no cost.
Contact us to learn more.
