Sweeten Your Lender Relationships With Strong Financial Reporting

Financial institutions are by nature, cautious and highly skeptical of new lending requests. In addition to closely scrutinizing new customers, lenders keep careful track of the financial condition of existing borrowers. With little or no notice, a lender could close business credit lines or reduce the amount of available credit if certain metrics go sideways.

In order to receive or continue to receive credit from banks, companies should be aware of the three types of financial statements that banks typically request:

• Compiled statements. These provide no assurance that the financial statements are accurate, complete and comply with Generally Accepted Accounting Principles (GAAP).

• Reviewed statements. These provide limited assurance that the financial statements are accurate. Typically, your accountant will review the statements to ensure that obvious errors or misstatements are corrected.

• Audited statements. These provide the highest level of assurance that the documents fairly present the company’s financial performance consistent with GAAP.

In some cases, compiled financial statements might suffice. But when credit is tight or a lender decides to manage its risk more closely, it could require reviewed statements or even request audited statements. As the level of assurance required increases, so too can the associated cost to prepare the financial statements. A close partnership between your company’s accounting department and your CPA firm is critical to minimizing the cost and lead time associated with preparing financial statements.

In addition to the type of statements lenders may request, the frequency of statement production also may change. Your lender could request Interim statements that summarize a reporting period of less than a full financial year (typically quarterly or mid-year). To facilitate a lender’s request, your company’s accounting firm should be intimately aware of any changes in your accounting methods or processes, as well as any updates or upgrades you’ve made to your accounting technology. Regular communication with your CPA regarding the state of the business can significantly increase the probability of timely and accurate financial statement submissions.

Lenders tend to scrutinize the following two aspects of requests for financial statements:

• Significant customer reporting. If revenue is concentrated in a limited number of customers, lenders will often ask for ad-hoc reports detailing the status of accounts receivable, unbilled revenue, as well as the overall profitability of each major customer relationship.

• Timely submission and confident presentation. Any undue delay in the production of financial statements can give bankers pause. “A day late and a dollar short” could result in the reduction or closure of a credit line. Planning ahead can ensure the timely submission of requested documentation. Set up regular meetings with your CPA to discuss trends and your accounting processes or challenges. One of these meetings can even serve as a dress rehearsal for interacting with a lender.

If used appropriately, the burden of additional loan reporting requirements can actually be used as a valuable financial management tool. By embracing the fact that you must generate and submit financial statements, you might very well be able to improve your financial performance. Many business owners realize that being required to produce more frequent and complex financial statements provides them with a wealth of data and insights into what drives revenue and profitability — and what’s costing them too much money.

At the end of the day, access to credit is critical to the financial success of most companies. So, be prepared to satisfy lenders’ requests before they’re made. And treat yourself to a piece of cake.

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