Making your Small Business look good to lenders.
It is in the best interest of a small business owner looking for bank financing to present its financial information in the best possible light. The following are some tips on how to present the numbers to your banker.
Quality of financial information:
If you can afford it, retain the services of a local CPA (Certified Public Accountant) firm to compile your financial information. Corporate financial statements can be:
Audited: The CPA provides an opinion as to the accuracy of the financial information provided. The information is submitted to some tests that might include visits to the warehouses to check inventory levels, communication with vendors and account debtors to check account payable or account receivable balances, etc. The opinion in audited financial statements can be unqualified, which means that the accounting firm believes that the numbers reflect an accurate picture of the company or can be qualified, which means that the accounting firm has something that it disagrees with or wants to bring attention to. Of course, unqualified is much better than a qualified.
Reviewed: The CPA not only compiles the financial information, but digs deeper. No opinion is expressed, but the accountants pay more attention to the numbers and might reclassify some accounts to comply with GAAP (Generally Accepted Accounting Principles).
Compiled: The CPA puts together the financial information that is given to them. A limited amount of work is done to make sure that the assets and liabilities balance on the balance sheet and that the structure in both the balance sheet and income statement is correct. Having your business corporate financials compiled is not that expensive. If you contact a local CPA firm, it could cost you as little as a thousand dollars.
Company Prepared: As I said before, I recommend that you get at least compiled financial statements, but if the business is too small or the price is too high you might be able to get by with company prepared financials. Most banks do not require compiled or better unless you are requesting more than $250,000. However, check with your banker for the requirements of the institution you are looking to do business with. I do suggest that even if you get compiled statements that you prepare your own, the accountant might even give you a discount if most of the work is done.
Preparing the business for fiscal year end:
Taking into consideration that the statements are usually done at the end of the fiscal year and that those numbers will influence how your company is perceived, there are several things that can be set in motion to make the numbers look better.
1- Increase the amount of cash. The most important account in the asset section, a good balance will reflect positively on the liquidity of your company.
2- Speed up collections of seriously past due accounts. If you are still carrying receivables after 90 days past due reinforce your collection efforts. You might also consider converting some of the delinquent accounts into notes payable in less than a year so that they can be counted as a current asset.
3- Use vendor financing, this means that if you can afford to pay your account payables after the end of the year do so. Of course, try not to alienate your vendors.
4- Match your liabilities with your assets. A lot of small businesses fall into the trap of buying fixed assets with short term lines of credit. It looks bad when there is a lot of short term debt that should be used to finance receivable and inventory and is really used to buy property or equipment.
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