Important Financial Statements

[John King]

Hi Guys,

When seeking financing, whether it be from a bank or private lender, what types of financial statements should be presented to show the lender professionalism and that due-diligence has been thoroughly performed?

Thanks in advance.

[Bill Gulley]

First, in a secondary market product, you'd only get into statements if 1. they were self employed 2. if it was a thin deal needing a better insight in a fairly new small business, as you're really looking at tax returns for the meat.

Commercial, at any size, we'd need a balance sheet and income statement, 2 to three years and a proforma of expected business operations, at least a year, generally 2 to 3, larger entities can require more either way. Another is an analysis of use of funds if not obvious like in a sale. I'll stick to RE.

First thing to look at is the income statement, reading from the bottom up really, what's the bottom line?

Then to the expenses. Any good lender will be looking at what is customary for that type of business and the "chart of accounts" will tell you how detailed the borrower is. Detail should not be extreme, but adequate to illustrate accurately the nature and amounts of expenses. I like to see good form and proper recognition of fixed and variable costs. Small businesses mostly on a cash basis, keep it simple.

On a balance sheet, it's usually pretty simple for small ventures, but if they had "contingent liabilities" noted, that was a plus in view of their recognition of such business exposures. Footnotes helped in showing their openness in disclosures.

A business plan can be rather simple, incorporated into a cover letter in fact for a single borrower. If partners are involved, personal statements, such as the loan application but also a note of their business experience, education in that field or comments as to their abilities will show well.

If you're an accountant, you know what I'm saying, if not, might be a good idea to get with one, one who knows proforma statements.

The biggest issue I had was underestimating expenses and over stating income projections, looked like they were fluffing the venture trying to sell me......that went to file 13!

As Dion mentioned, lenders will do their own due diligence, much will be verified as to the industry (like apartment management/operations or contractors operations). But, the numbers you give are the beginning and these statements are part of the loan request, so make sure they are right.

Comment; as to an active lender, often they will have better data on local business operations than a borrower does. If I made 250 construction loans, you're not going to convince me that payroll labor is going to be 80% of the norm on a 2500 sq ft building, without a good reason why, or why you flat work is going to be significantly less than the last ten builds that ran through, or you think it will only rain 3 days in April during your build. Just FYI to keep in mind.

Lastly, don't over do it, your statements should be applicable for the size and scope of the request, very simple is fine for a small operator, complexity grows with the requested amount and duration in short term financing.

As to private lenders, as individuals, some can't even read a balance sheet, they can read their investment statements. It depends on their sophistication in business as to what they want to see, some take things to their accountant or attorney or both, so be prepared to present the same thing you would for a bank. :)