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What Lenders Expect in a Financial Settlement
By Matt Grigsby
Though there are signs of an economic upturn, obtaining business credit is still a difficult endeavor. Financial institutions continue to exercise caution and are particularly cautious when analyzing loans for businesses in certain industry sectors. Construction is one of them.
Consequently, lenders are requesting a variety of financial statements when determining credit worthiness. So what does a borrower need to know? Here are answers to some of the statements lenders are requesting.
What is a compiled statement?
In the past, a compiled or unaudited statement was sufficient. This type of document, however, doesn’t provide assurance that the financial statements are accurate, complete or comply with generally accepted accounting principles (GAAP). Lenders are now requesting reviewed statements or possibly audited statements.
What are reviewed statements and audited statements?
A reviewed statement provides a degree of assurance that the financial statements are accurate. These statements are typically reviewed by your accountant to ensure that obvious errors or misstatements are corrected.
Presenting an audited statement ensures that the documents are consistent with GAAP and fairly represent the company’s financial performance. It is critical for your company’s accounting department to maintain a close partnership with your CPA to minimize the cost and lead time necessary to prepare the required financial statements.
Something else to note: The type of statement is not the only thing that’s changing; lenders are also changing the frequency of statements. Often, lenders are requesting an interim statement, covering a quarter or half year (instead of a full financial year). To provide accurate reporting, it is important for your company’s accounting firm to be aware of major changes in your accounting processes.
What are lenders
looking for in financial statements?
In particular, lenders are looking for:
Significant customer reporting – If your company’s revenue comes from a few customers, lenders will request reports detailing the status of accounts receivable, unbilled revenue, as well as the overall profitability of the relationship.
Timely and complete submissions – This is a case where “Too little too late” could cost you. Any delays in timing or completeness of your report could result in the reduction or closure of a credit line. Planning ahead is essential as is regular meetings with your company's accounting firm to keep up on trends and your overall accounting processes. Access to credit is crucial to a company’s financial success. Being prepared to respond to a lender’s request is your first step.
Any advice in this communication is not intended or written by Rehmann to be used, and cannot be used by a client or any other person or entity for the purpose of: (I) avoiding penalties that may be imposed on any taxpayer or; (II) promoting, marketing or recommending to another party any matters addressed herein. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Matt Grigsby, CPA, is a senior manager for Rehmann located in the Traverse City office. He is a member of Rehmann’s Real Estate and Construction Industry Group and specializes in technical issues regarding property capitalization and depreciation, particularly related to cost segregation studies.