Financial reporting requirements for small business loans, and continuing financing support after initial business financing is received.
Many entrepreneurs in process of rapid expansion and growth of their business, are looking for small business loans to cover cash flow needs, new purchases requirements, new employee hires etc. When lenders are approached, business owners receive a very substantial influx of information that for most unsophisticated business owners is very tough to apprehend. Initial package normally includes, properly prepared business plan, strategic plan, marketing plan and use of proceeds, break even analysis, income statements and balance sheet proformas.
Working capital loans are typically one of the most difficult types of loans to receive. In order to be able to qualify for small business loan, business owner has to properly prepare financial statements for his firm for 2 or in some cases 3 years. Financial reporting requirements are different from lender to lender, but there are a lot of common items that has to be followed for most small business loan providers. In this article we will talk about financial reporting requirements for small business loans, and continuing financing support after initial business financing is received.
Small business development and growth is a very difficult and tedious task. Most entrepreneurs running their small businesses have no time to properly prepare financial statements for their accountants to review, and therefore quality of the documents suffer a lot. There is a limited number of products that is available for small business owners when looking for working capital financing under $350,000. Most bank offer a government guaranteed small business loan, that is both complicated to qualify – and difficult to get.
Existing business owners looking for financing are required to present 2-3 year CA prepared financial statements with NOTICE TO READER quality of reporting. Generally speaking NOTICE TO READER means that accountant certifies that numbers are free from material mistakes up to 10% of the margin of materiality. When business grows fast, execution and sales are the major concerns for the business owners, accuracy of book keeping and correctness of application of accounting principles is on the second plan. Now if entrepreneur is planning to obtain small business loans in a future, or at least keep it as an option, proper reporting and accounting is a must.
What it means for small business owners?
- Proper business investments record from day 1 to write off every invested dollar from taxes in the future
- Proper inventory count
- Proper expense ledger
- Accurate employee salary ledger
- Accurate purchases ledger
- Correctly recorded sales
- Timely sales tax remittances
There are many other areas that business owner needs to excel as well, which we will not touch in this article. Also as a general practice it is important to show positive income on year end statements even when other possible write off exist. Small business loans are only offered to companies that make money, and nobody cares that you can write off, you need to be in green to get financing!
For entrepreneurs running medium and large enterprises, looking for operating capital, equipment, or other types of loans of above $500,000 financial reporting requirements are different from smaller counterparts. Depending on the size of the operations and also business loan amount requested, REVIEW ENGAGEMENT quality of financial statements are required, and in some cases – audited statements. This level of reporting is required for several reasons when applying for business financing.
- More accurate reporting for quality assurance
- Risk management requirements
- More detailed review of internal controls and processes
It is super important for sophisticated entrepreneurs and less sophisticated to plan this out early, and in case business loan is needed the reporting is on hands. WeCanFinancial suggest to use a rule of thumb for businesses with revenues less than $1million per year – NOTICE TO READER is fine. For businesses with revenues of$1-$3 Million – REVIEW ENGAGEMENT is the standard. For businesses with higher revenues audited financials is the safest bet to be ready to apply and successfully qualify for business financing.
We wish all our entrepreneurs Happy Financing, please contact us for any questions in regards to business financing and more!