The records a lender asks for

When a client tells us they are applying for a line of credit or an equipment loan, the first thing we do is build the lender's file ourselves. Every bank sets its own list, but the core records are close to identical from one lender to the next. A file that is complete and consistent on day one moves through underwriting with fewer rounds of questions.

The usual list

The number of years, the ownership level at which an owner's personal records are required, and the form of the personal financial statement all vary by lender and by loan program. Ask for the lender's checklist at the first meeting and work from it.

The returns and the transcript

Many lenders verify returns directly with the IRS. They ask you to sign Form 4506-C, which authorizes a participant in the IRS Income Verification Express Service to receive your transcripts. The IRS must receive the form within 120 days of the signature date, so a form signed early in a long application may need to be signed again.

The transcript shows what the IRS has on file. If you amended a return, or a return for the latest year is still on extension, tell the lender at the start. A mismatch they discover on their own costs more time than one you explain in the cover note.

The interim statements

The year-to-date profit and loss and balance sheet are where lenders spend their time. They compare them with the last return and ask why margins, revenue or debt moved. The statements should come from books that are reconciled through the most recent month-end, with bank and credit card balances that tie to the statements. A profit and loss run on the day of the application, from books last reconciled in the spring, tends to produce questions the owner cannot answer on the spot.

Two items draw attention in most reviews. The first is owner compensation: distributions, draws and personal expenses paid by the business. Show them clearly and consistently. The second is one-time items, such as an equipment sale or a legal settlement. Label them, so the lender does not read a single good year as the new normal.

Compiled, reviewed or audited

For larger loans, a lender may ask for financial statements prepared by a CPA, and the loan agreement may require them every year after closing. There are three levels of CPA involvement:

• Compilation. The CPA presents your financial statements in proper form. There is no assurance on the figures.

• Review. The CPA performs inquiry and analytical procedures and provides limited assurance that no material changes are needed.

• Audit. The CPA tests the records and provides reasonable assurance that the statements are free of material misstatement.

Each level takes more time and costs more than the one before it. Read the loan agreement for the level required, the deadline after year-end and any covenants measured from the statements, such as a minimum debt service coverage ratio. A covenant tested on reviewed statements is a number to watch during the year, well before the review.

Preparing the file

We build a lender file in the same order every time:

1. Close and reconcile the books through the latest month-end.

2. Reconcile book income to the most recent return and write down the differences.

3. Prepare the debt schedule from the latest loan and lease statements.

4. Collect formation documents and any amendments that changed ownership.

5. Write a one-page note that explains the unusual items before the lender asks.

The file also serves the owner. The reconciliation in step two shows exactly where tax income and book income part ways, which is useful long after the loan closes.