When a business applies for a loan or a renewal, the owner’s question is simple: will our numbers support what we are asking for? Lenders ask a version of the same thing. They want to see that the business generates enough cash to cover its debt payments, and that the financial statements, tax returns and bank activity tell a consistent story. A business that can show both can reduce avoidable follow-up.
How a lender reads cash flow
Most lenders start from earnings and adjust toward cash: they add back items such as depreciation and interest, consider what the owners take out, and compare the result with the yearly payments on existing and proposed debt. The ratio between the two, often called debt service coverage, is a common test, though each lender defines it in its own way. SBA lending requires creditworthiness and reasonable assurance of repayment, and the criteria that apply may include an applicant’s credit history, earnings or cash flow, and equity or collateral. Individual SBA programs add their own requirements.
Three records that should agree
Internal statements, tax returns and bank deposits rarely match line for line, and they do not need to. They are prepared for different purposes and periods. What lenders look for is that the differences can be explained: a reconciliation from book income to taxable income, a note on a one-time repair, the reason receivables grew. An explained difference is usually settled quickly; an unexplained one tends to invite follow-up.
For a closely held business, lenders usually look at the owners as well: personal tax returns, personal financial statements and, often, guarantees. The owners’ returns tell part of the business’s story, so it helps when they are current and consistent with the company’s.
Preparing before the request list
Before an application, it helps to have closed and reconciled statements through a recent month-end, current aging for receivables and payables, a schedule of existing debt, and the last few years’ returns. One-time items and unusual owner compensation are easiest to support when they are documented as they happen. SBA loans follow the SBA’s SOP 50 10, which changes periodically. The SBA’s effective dates and transition rules decide which version applies, and the lender confirms it. The lender’s own list decides what is needed, so it is worth asking for it early.
- Financial statementsCurrent and prior periods, with the reporting basis identified.
- ReconciliationsBank, credit card, debt and payroll accounts through a known date.
- Aging reportsReceivables and payables, with significant balances explained.
- Tax returnsFiled returns and any amendments or material changes.
- Debt scheduleBalances, payment dates and lender names.
- Support for unusual itemsOwner pay, distributions, one-time costs and related-party activity.
Where we help
We prepare and reconcile the financial statements and tax information within our engagement, so the package can be ready before the request list arrives. The credit decision itself belongs to the lender.
Sources
Start before the application.
Tell us about the financing you are considering and when. We can talk through how your numbers will read and what to prepare.
Contact our team