You’ve been updating your Quickbooks or spreadsheet, working tirelessly with your bookkeeper and/or accountant, and are nearly finished with your 2013 tax filing. Congratulations! Now what?
Preparing Your Tax Return
As it turns out, tax time is the best time to apply for business financing, since you’ve already pulled together most of the documents you need for tax purposes, so your financing package is more “complete” at this time of year than any other.
Many small businesses need to secure financing for growth or expansion, but no matter who you approach for financing, the lender will have expectations. You can significantly increase your chances of success by being prepared to meet those expectations.
So the key to getting a loan is preparation.
First, gather together the documents that will help persuade the lender that a business loan is necessary and that you are a good risk. You may need:
- Financial Statements and Projections for the company
- Past business and personal tax returns
- A credit report and synopsis of your personal financial status
Why does the lender need things like historical tax returns and what will they do with them?
Different lenders ask for different things. Some lenders are interested in historical financial data because it shows how your business performed over a period of time. Most lenders will rely more heavily on your recent year-end results as an indication of the business’ capacity to service debt.
While at first glance providing a lot of information appears burdensome, usually, the more information you can provide, the better for you in the long run. As a rule, the less information, the more expensive the financing. A little effort today may mean a big payback in lower costs in the future.
What specific information in my tax return is going to be used by a lender in underwriting my request?
Highlighted below are some of the items the lender will focus on when calculating EBITDA (earnings before interest, taxes, depreciation, and amortization) from a tax return:
Net income (loss) per books –
This is can be found on Schedule M-1 of the corporate tax return for a corporation or a partnership. This is often the bottom line number that lenders use to assess cash flow.
Depreciation, Amortization, and Section 179 expense–
There are several places on the tax return where depreciation, amortization, and Section 179 expenses can be found. These items are important because they are typically seen as additions to net income in calculating EBITDA.
This shows the lender what you’ve paid in interest and is also typically seen as an addition to net income in calculating EBITDA.
Compensation of officers and/or distributions–
Lenders want to know that the business can support your living expenses. This is why they want to know how you were compensated. EBITDA will need to be adjusted for compensation if none is taken.
Loans to/from Shareholders–
Changes in these balance sheet items, year over year, show if money was invested or taken out of the business. In some cases, money will be taken out of the business through a loan rather than a distribution or salary. Money taken out of the business in this way may be a reduction to EBITDA. On the other hand, a lender often views loans made to the company by the shareholder as equity.
Besides using the tax return as a measure of how well the business can service debt, the lender can get a lot of other useful information. Lenders are interested in trends in sales, gross profit, total expenses, and net profit.
So, be prepared to explain significant changes in income, expenses, and balance sheet items. It is always a good idea to thoroughly review your tax return, especially compared against previous ones, and make sure you have a basic understanding of it.
For more information, or if you would like us to help you understand your tax returns further, let us know!