Financial Statements for a Bank Loan: What Lenders Ask For

What financial statements does a bank ask for on a business loan?

A bank asking for financial statements wants a profit and loss statement and a balance sheet, and may add a cash flow statement, tax returns and projections. The lender decides the list, how many years it wants and whether a CPA must prepare the statements. For an SBA-guaranteed 7(a) loan, SBA says you apply through a lender, which works out the documents you need from your circumstances (SBA: 7(a) loans). A loan without an SBA guarantee has no SBA checklist behind it, so ask the bank for its own written list.

The IRS names the first two as the statements that help in dealing with a bank or creditors (Publication 583).

A bank may also ask about the owners, such as personal returns or a personal financial statement; for that statement, see SBA loan financial statements.

A case stops being simple when the books are months behind, when business and personal money share an account, when the statements differ from the filed return, or when the bank has set a date. The first two usually mean finishing or correcting the books before statements can be built; a gap with the return may be a legitimate difference that needs a written bridge (see below). If the bank's date is close, get bookkeeping help.

Gather:

• The last two to three filed business returns; the lender sets the actual number.
• A profit and loss statement and balance sheet for the year so far, through the latest month-end.
• Bank, credit card and loan statements for every month those statements cover.
• A list of every business debt: lender, balance, payment and end date.
• A list of unpaid customer invoices and unpaid bills.

How many years of profit and loss statements does a lender want?

Plan on the last two to three filed business returns plus year-to-date statements. The lender sets the actual number of years, and none of the sources cited here fixes one for a loan without an SBA guarantee. SBA's guidance for a traditional business plan, which lenders and investors commonly request, tells an established business to include income statements, balance sheets and cash flow statements for the last three to five years (SBA: business plan). That is guidance for a plan, not a loan rule.

For an SBA-guaranteed loan, see SBA loan financial statements.

Keep copies of every filed return. A return transcript a lender requests with Form 4506-C covers returns the IRS processed in the current year and the prior three processing years (Form 4506-C instructions). For older returns, use your own copies, ask your preparer, or request a copy on Form 4506: the fee is $30 per return and processing may take up to 75 calendar days.

A newer business has fewer years to show. It gives the periods it has traded, closed month by month, and relies on projections for the rest. A business that changed its tax form, such as an LLC that elected corporate treatment (IRS: LLCs), has returns on different forms: give the lender each one and the date of the change.

What is a year-to-date (interim) statement, and when does the bank ask for one?

A year-to-date, or interim, statement is a profit and loss statement for the current year so far plus a balance sheet at the latest month-end (Publication 583 defines the two statements). A bank may ask for one when the last full-year figures are months old, because a year-end statement or a filed return says nothing about the months since. For an SBA-guaranteed loan, see SBA loan financial statements.

An interim statement has to come from closed books: every bank, card and loan account reconciled through the month-end it shows. Ask the lender which period end it will accept before closing the books, then close to that date.

Does a bank require CPA-prepared financial statements?

The bank decides whether a CPA must prepare the statements. No source cited here requires CPA-prepared statements for an ordinary bank loan: SBA's 7(a) page states no such requirement and leaves the document list to the lender (SBA: 7(a) loans). For some SBA loan types, SBA's own procedures do name a CPA level: 504 loans, working-capital lines over a set size and business purchases (SOP 50 10); see SBA loan financial statements. SBA's finance guidance lists a CPA, a bookkeeper and an online service as ways to get accounting help (SBA: manage your finances).

A bank's own policy can still ask for more, including statements that a CPA compiles, reviews or audits. Ask the bank in writing which level it accepts before paying for any; for the difference, see audited financials for investors.

Statements from your own books are enough only if the lender accepts them, and only as good as the books under them. The IRS says books must show gross income, deductions and credits, backed by supporting documents (Publication 583).

Which tax returns and IRS transcripts go with the statements, and how must the numbers tie?

The lender sees the return for your business type, and your statements have to reconcile to it. Compare the same period, and explain each legitimate book-to-tax difference. Both come from the same books.

The partnership and corporation returns carry a balance sheet per books, Schedule L, which the instructions say should agree with the books (Form 1065, Form 1120-S, Form 1120). Small filers can be exempt from Schedule L under each form's instructions, so a return may contain no balance sheet at all. Where it does, the bank can set your balance sheet beside the return's.

The IRS releases tax records to a lender only with your consent. You can authorize a lender to request a transcript through your IRS account, or through the lender with Form 4506-C (IRS: IVES). For how the request works, see proving income to a lender.

A profit and loss statement whose income differs from the return or from the bank deposits can draw questions from a lender. Some differences are legitimate, such as depreciation taken differently for tax or income landing in a different period. The answer is a short written bridge from book profit to the return's figure, with support for each step, not a changed statement. For the schedules that reconcile books to a return, see accrual books and a cash-basis tax return.

Should the statements be cash or accrual?

Use the basis the lender names. If it names none, the basis your tax return uses is the usual starting point. Under the cash method income counts when received and expenses when paid; under an accrual method, when earned and incurred (Publication 583). A cash-basis balance sheet generally shows no receivables or payables, so a business that sells on credit can be asked for accrual figures.

Taxable income is figured under the method regularly used in keeping the books (section 446(a)), and the IRS says the method for taxable income and the method for the books must be the same (Publication 583). The regulation also lists "a reconciliation of any differences between such books and his return" among the records to keep (26 CFR 1.446-1(a)(4)), and the Schedule M-3 instructions describe a corporation with accrual financial statements and a cash-basis return (Schedule M-3 instructions). So lender statements on a different basis from the return need a written reconciliation to it. Whether the return itself may stay on cash is a separate question; see accrual books and a cash-basis tax return.

Changing the method on the return generally needs IRS consent, requested on Form 3115 (section 446(e), Publication 538); see switching from cash to accrual accounting. Not every business may use the cash method. A C corporation, or a partnership with a C corporation partner, generally can use it only while its average annual gross receipts for the three prior years are $32,000,000 or less, with exceptions such as farming businesses and qualified personal service corporations (section 448). A business with inventory faces limits of its own (Publication 538). To choose a method, see cash or accrual for a small business.

What are projections, and when does a lender want them?

Projections are forecast versions of the statements for future periods. SBA's guidance for a traditional business plan calls for a five-year outlook: forecast income statements, balance sheets, cash flow statements and capital expenditure budgets, with the first year by quarter or month, explained and matched to the amount requested (SBA: business plan).

A lender may ask for them from a newer business with little history, or when the loan funds growth that past results do not show. Projections rest on actual results: reconciled history gives the starting balances and the revenue and cost pattern the assumptions build on. A line of credit tied to receivables may also bring requests for receivable and payable agings (unpaid customer invoices and unpaid bills, listed by age), as in SBA's working capital line pilot (SBA: 7(a) loans).

What stalls a business loan application?

Three common causes of delay are accounts that are not reconciled, owner and business money that is mixed, and statements with unexplained differences from the return or the deposits.

What if my books are behind or I have never produced a balance sheet?

Books that are behind have to be finished before statements can be built. A balance sheet is not added at the end: it comes out of reconciled accounts and correct opening balances. Work in this order:

1. Get the lender's list and the date it needs the statements.
2. Collect statements for every bank, card and loan account since the last filed return's year-end.
3. Set opening balances. A partnership or corporation that filed Schedule L has the prior year-end balance sheet; a sole proprietor's Schedule C has none, so rebuild it from account, loan and asset records. See opening balances when books start late.
4. Record every transaction and reconcile each account month by month. See rebuilding books from bank statements.
5. Run the profit and loss statement and balance sheet through the month-end the lender will accept.
6. Compare income with the deposits and the return, and write the bridge for anything that differs. Send the statements after that.

If the lender's date comes before the catch-up can finish, ask whether it will accept a later date, or get bookkeeping help to finish the months first. For months of backlog, see catching up on overdue books.

Example

These examples are illustrative; all figures are in US dollars.

Landscaping S corporation, equipment loan

An S corporation asks a bank for a US$150,000 equipment loan. The bank's list asks for two years of business returns plus a current profit and loss statement and balance sheet. The corporation has filed Form 1120-S both years but has no current profit and loss statement or balance sheet to give the bank. The bookkeeper reconciles the bank and card accounts through the last month-end, sets opening balances from last year's Schedule L (or from account and loan records if the return had none), and runs both statements. The owner checks that the year-to-date income is in line with business deposits and that an existing US$40,000 truck loan is on the balance sheet.

Restaurant LLC, line of credit with books behind

A restaurant LLC with US$400,000 of sales applies for a US$75,000 line of credit. Its books are six months behind: six months of bank and card activity are unrecorded. The statements cannot be built from the books as they stand, because income, expenses and the cash balance would all be wrong. The owner asks the bank for its date, finishes the six months of catch-up, reconciles every account, and only then produces the year-to-date statements.

Freelance designer, term loan

A designer asks for a US$30,000 term loan. The bank wants a profit and loss statement that ties to the Schedule C and to the bank deposits. Last year's Schedule C shows US$62,000 of gross receipts. This year's statement through June, kept on the cash method, shows US$35,000 of income, but deposits in the business account total US$31,000, because clients paid US$4,000 into a personal account. The designer lists those payments in a short schedule that bridges income to deposits, with each client's invoice and the personal-account deposit as support, and has clients pay the business account from now on.

Different for you?

• The bank wants statements by a date and your books are behind, mixed with personal spending, or differ from your filed return: the statements can only come from closed, reconciled books. Work out whether you need a catch-up, a correction or only a supported reconciliation, and get bookkeeping help scoped to the bank's list and date. For missing months, start with catching up on overdue books.
• A business return was never filed: the lender cannot compare statements with a return that does not exist. See catching up on unfiled business returns and bookkeeping help for the books underneath it.
• A foreign person owns the LLC or corporation: the returns the lender sees can differ from the table above. See bookkeeping for a foreign-owned US company, and get bookkeeping help so the statements tie to those returns.
• The loan is an SBA loan: the forms, the personal financial statement and the debt schedule are covered in SBA loan financial statements.
• The lender or an investor wants a review or an audit: see audited financials for investors.
• You are self-employed and the lender wants proof of personal income: see proving income to a lender; for a mortgage and Schedule C add-backs, see Schedule C income for a mortgage.
• The statements are for rental properties: see rental property profit and loss for a lender.
• The loan is approved: see recording a business loan.