You’re looking for a loan. Your bank wants information to gauge if you have a healthy company. Therefore, the more a lender knows about your business and can see into its financial workings, the better your chances are for securing. Sufficient financial transparency can help obtain your loan.
As you ask for more money, banks want more detail and therefore it is important to find the proper level of assurance lenders require. There are three types of statements that banks may ask for: compiled, reviewed or audited.
A compiled financial statement is required when you are not looking for mounds of money. It offers no assurance of the accuracy of the financial statement, just a general understanding of your business and the accounting principles used and that you present financial reports in the proper format.
A reviewed financial statement digs deeper, providing limited assurance to the reasonableness of your firm’s financial condition as presented in the financial statements.
Lastly, audited financial statements offer a degree of confidence for lenders that they were prepared with the proper financial reporting framework. Bankers typically want these when you’re looking for big bucks.
“The best solution is to answer all the questions before the bank asks them,” says Michael Corkery, a business and financial guru located Melville, N.Y. The point is to know what information is required in advance, so you can be ready to hand it over. If you know what documentation, projections and narratives the loan review process will entail, you’ll prepare so you’ll get the best loan package possible in the shortest time. Other details you may need to present include your inventory turnover ratio, your balance sheet and profit and loss statements for the past couple of years. As you get to the audited loan, you will have to offer more of a story about your business. For example, are you involved in related companies like real estate? Are you taking a percentage of profits from an operating company?
All this is to let the bank know your tangible net worth. Lenders may ask for a cash flow statement and you’ll have to show that you’ll be able to pay back the loan. Bankers feel more comfortable making a loan when there are various assets being used as collateral, including accounts receivable, inventory and equipment. Lenders may even extend more credit knowing specific assets are available as a borrowing base.
On the other hand, what if you need money because cash is not flowing in? How would you get a loan then? The bank will want to see your business plan: Do you need the money for a new product, for new operating segments, to reduce overhead costs or to expand?
Keep in mind that in general, financial institutions are looking for opportunities to lend money, to be a financing source. They want to work with you, but they need to see a plan: Without one, it can take you six months to a year to get the loan you’re after. With the details planned beforehand, you’re likely to get your loan in a couple of months.