Day 14 : How to Prepare Your Financial Statements for a Lender
Whether you're seeking a business loan, line of credit, or equipment financing, lenders require comprehensive financial statements. Proper preparation can mean the difference between approval and rejection. Here's how to present your finances in the best possible light.
Understanding What Lenders Want
Lenders evaluate the "5 C's of Credit":
Character: Your track record and integrity
Capacity: Ability to repay the loan
Capital: Your investment in the business
Collateral: Assets that secure the loan
Conditions: Economic and industry factors
Your financial statements address most of these criteria directly.
Required Financial Statements
Balance Sheet Shows your financial position at a specific point in time:
Assets (what you own)
Liabilities (what you owe)
Owner's equity (net worth)
Income Statement (Profit & Loss) Shows your profitability over a period:
Revenue
Expenses
Net income/loss
Cash Flow Statement Shows how cash moves through your business:
Operating activities
Investing activities
Financing activities
Statement of Owner's Equity Shows changes in ownership over time:
Beginning equity
Additional investments
Retained earnings
Distributions
Preparation Standards
Compilation vs. Review vs. Audit
Compiled Statements:
Prepared by accountant without verification
Lowest level of assurance
Acceptable for smaller loans
Most cost-effective option
Reviewed Statements:
Accountant performs limited procedures
Moderate level of assurance
Required for larger loans
More expensive than compilation
Audited Statements:
Highest level of assurance
Required for significant loans
Most expensive option
Involves extensive testing and verification
Timeline Considerations
Recent Statements Required:
Most lenders want statements within 90 days
Some accept up to 180 days for audited statements
Interim statements may be required
Year-end statements are typically most important
Historical Requirements:
3 years of statements (typical minimum)
5 years preferred for larger loans
Consistent preparation standards across years
Explanation of any changes in accounting methods
Key Ratios Lenders Analyze
Liquidity Ratios
Current Ratio: Current Assets ÷ Current Liabilities
Quick Ratio: (Current Assets - Inventory) ÷ Current Liabilities
Working Capital: Current Assets - Current Liabilities
Leverage Ratios
Debt-to-Equity: Total Debt ÷ Total Equity
Debt Service Coverage: Net Income + Depreciation ÷ Debt Payments
Times Interest Earned: EBIT ÷ Interest Expense
Profitability Ratios
Gross Profit Margin: Gross Profit ÷ Revenue
Net Profit Margin: Net Income ÷ Revenue
Return on Assets: Net Income ÷ Total Assets
Return on Equity: Net Income ÷ Owner's Equity
Efficiency Ratios
Inventory Turnover: Cost of Goods Sold ÷ Average Inventory
Accounts Receivable Turnover: Revenue ÷ Average A/R
Asset Turnover: Revenue ÷ Average Total Assets
Optimizing Your Financial Presentation
Balance Sheet Optimization
Strengthen Your Assets:
Ensure all assets are properly valued
Consider professional appraisals for significant assets
Include intangible assets like customer lists or patents
Properly classify assets (current vs. long-term)
Remove or write down obsolete inventory
Manage Your Liabilities:
Pay down credit cards and lines of credit before applying
Reclassify owner loans to equity if advantageous
Ensure proper classification of current vs. long-term debt
Clean up any old payables or accruals
Document any disputed liabilities
Income Statement Enhancement
Revenue Recognition:
Ensure revenue is recorded in the correct period
Document large or unusual transactions
Provide detailed revenue breakdowns
Show revenue trends and seasonality
Explain any significant variances
Expense Management:
Ensure all expenses are properly classified
Separate one-time expenses from recurring operations
Document owner compensation and benefits
Properly categorize cost of goods sold
Explain any significant expense variances
Cash Flow Improvements
Operating Cash Flow:
Show strong cash generation from operations
Explain timing differences between net income and cash flow
Document working capital changes
Highlight efficiency improvements
Address any cash flow concerns
Supporting Documentation
Management Discussion & Analysis Prepare a narrative that explains:
Business overview and strategy
Industry conditions and opportunities
Financial performance explanations
Significant events or transactions
Future plans and projections
Additional Documents
Personal financial statements for owners
Business tax returns (3 years)
Personal tax returns for guarantors
Accounts receivable aging reports
Accounts payable aging reports
Inventory reports and turnover analysis
Fixed asset schedules
Insurance coverage documentation
Common Red Flags to Avoid
Financial Red Flags:
Declining revenues or profits
Poor working capital management
High debt-to-equity ratios
Irregular financial reporting
Significant related-party transactions
Operational Red Flags:
Customer concentration risks
Seasonal business patterns without planning
Management inexperience
Competitive disadvantages
Regulatory or legal issues
Presentation Red Flags:
Incomplete or late financial statements
Frequent restatements or corrections
Poor record keeping
Inconsistent accounting methods
Missing supporting documentation
Industry-Specific Considerations
Service Businesses:
Focus on recurring revenue
Highlight client retention rates
Document professional qualifications
Show scalability potential
Retail Businesses:
Emphasize inventory management
Show seasonal planning
Document supplier relationships
Highlight location advantages
Manufacturing:
Focus on efficiency ratios
Highlight equipment condition
Show capacity utilization
Document supply chain stability
Technology Companies:
Emphasize intellectual property
Show recurring revenue models
Document competitive advantages
Highlight scalability
Working with Professionals
Accountant Selection:
Choose accountants experienced with lending
Ensure they understand your industry
Verify their credentials and reputation
Discuss timeline and cost expectations
Banker Relationships:
Build relationships before you need money
Understand your banker's lending criteria
Communicate regularly about business performance
Be transparent about challenges and opportunities
Final Preparation Tips
Quality Control:
Review all statements for accuracy
Ensure consistency across all documents
Verify all mathematical calculations
Check for completeness
Proofread all narrative sections
Presentation Standards:
Use professional formatting
Include clear headings and labels
Provide comparative periods
Use consistent accounting methods
Include notes to financial statements
Remember, lenders want to say "yes" to good borrowers. By presenting clean, accurate, and well-prepared financial statements, you demonstrate the professionalism and financial management skills that inspire confidence.