Many small and mid-sized businesses are interested in borrowing money from lenders but find that lenders are unwilling to lend to them due to improper record keeping on their par Lenders will often demand certain reports in order to analyze the creditworthiness of the borrower and to increase the chances that they will be able to recover their loans and have sufficient protection again the risk of financial default on these loans. This article will highlight some of the common financial reports to commercialists like Doug Foshee and other information that small and mid-sized businesses will need to provide to lenders both initially when they are applying for a loan, as well as on an on-going basis.
After all, if a company’s financial position sours a lend will want to assert their claims early on in the process to prevent other creditors from getting preferential claims on the borrowers’ assets and can help to identify the company’s financial capacity to repay the loans. Providing income tax returns will show that the company is complying with their required tax filings and will reduce the risk that large fines will be levied by the IRS or other local tax authority which will have a priority over the lender’s balance.
Annual Financial Information
Most lenders will request financial reports including financial statements either on a monthly, quarterly, or annual basis, as well as filed income tax returns. Financial statements will commonly consist of a balance sheet, income statement, cash flow statement, and changes in equity statement. Most lenders will request at least three years of history on the financial statements. This information will provide lenders with information on the company’s earning history and current assets and liabilities balances.
Budgets and Financial Assumptions
Lenders will request that the company puts together budgets of predicted financial performance and then perform analysis of their actual numbers and these budgets. Basically, with this information, a lender will want to see that the company will have future cash flows that are sufficient to repay their loan as well as to maintain their other financial commitments. Attached to the budgets that are prepared a company will also request that the company provide the assumptions that are used in arriving at the budget and may request that the company perform stress tests. Stress tests involve a range of scenarios that will show the company’s financials if there was a drop in revenue to various degrees.
Other Compliance Reports
A lender will also require that a borrower provides certain compliance related documentation to a lender. Examples of the required documentation include covenant compliance certificates with detailed calculations as stipulated in the loan agreement, copies of insurance certificates that show that the company has maintained the agreement required insurance levels, and other miscellaneous reports such as sales by customer, schedules of accounts receivables and payables, and details of inventory on hand. Companies should be sure to read through their loan agreements in depth before signing them to make sure that they are able to comply with the required information.
Overall, taking out a loan can be an involved process, both initially and over the length of the loan. Companies will need to be in regular communication with their lenders and provide them with reports that provide them with certain pieces of financial information that can keep their lenders comfortable with the outstanding loan and their chances for repayment.