Preparing your accounts for a business loan
Gone are the days when the last couple of tax returns would suffice to get a business loan. The banks, spooked by the credit crunch, now require precise information before lending you money. So what sort of shape are your business accounts in?
Typically before lending you money or extending an overdraft, banks will want to see:
- Recent financials;
- Copies of business contracts;
- Along with any information supporting future income projections
If you need a business loan for business growth or survival, you will need good current business accounts, at least up to the last quarter. I’ve seen many times where the books were being done regularly but the quality of the data entry has severely compromised the quality of the information output.
Obviously if the transactions are not entered correctly, your reports from accounting software will be very misleading. To give such a set of business accounts to a bank, with incorrect treatment of transactions, the bankers will question the ability of the business owner to manage their own money, let alone that of the bank’s.
"If you need a business loan for business growth or survival, you will need good current business accounts, at least up to the last quarter."
How do you get your business accounts in shape for both management reporting and borrowing purposes?
- Firstly your basic bookkeeping needs to be accurate.
- Your Chart of Accounts needs to be set up right from the start. This is the accounts that you set up in your accounting software to categorise expenses and so forth.
- Have Direct Costs been allocated to the correct accounts or have they been allocated to an expense account or overheads? This can have a big impact on the gross profit shown in the Profit and Loss Statement. If the bank check against industry benchmarks, your results could be way out of line.
- Some reconciliation may need to be done to ensure it all makes sense e.g. is the total of your Accounts Receivables report the same as the figure shown in the Balance Sheet?
- Does the bank account reconcile or have entries been entered in the past to make it balance?
- Has the GST been properly reconciled and have you paid or been refunded the correct amounts?
The business accounts may need to be reviewed by someone other than the bookkeeper, if you aren’t 100% sure of the bookkeeper’s skills and qualifications.
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If you don’t have an in-house or outsourced Financial Controller you will need to approach your accountant.
- They will need information from you regarding the last couple of year’s business accounts, if they aren’t already available.
- They will need information about the current year results from your accounting software and your bookkeeper.
- They will need to sit down with you and come up with the projections for how you think the business will perform in the next year or two.
- They will need to get information from you to produce a cash flow report, so the bank can see your cash position in the future.
As you can see there is quite a lot of work to prepare your business accounts for a business loan application. Getting it right can pay big dividends as it will help you assure the bank of your financial control management. Good information will set you apart from the others, who roll in with hastily prepared numbers with dubious accuracy.