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'Fine-tuning' loan application can make difference

By , - Last modified: November 28, 2017 at 3:23 PM
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A services company in New Jersey wanted to make a business acquisition that would significantly expand its reach, but it needed up to $5 million in extra funds to make the deal happen. Before it submitted a loan application, the company turned to Levine, Jacobs & Co. LLC for advice.

“Before they extend credit, banks want to be reasonably confident that a loan will be repaid,” said Kim Forrester, a partner with the Livingston-based CPA firm. “Your CPA can help you fine-tune a loan application and get your financial affairs in order to improve your chances of getting approved.”

A properly structured business loan can be like a booster shot for a company, injecting cash just when it’s needed. Short-term financing is a kind of pick-me-up when cash collections are slow, while a long-term arrangement for a larger sum can be a foundation builder. But regardless of the kind of loan, preparing early and carefully will boost the chance an application gets a “yes.”

“If your accounting records are organized, it’s a lot easier for a bank to understand the status of your cash and other assets, as well as your liabilities,” explained Forrester. “Also, it’ll help if you have clear titles to assets, and are up to date with your taxes and any regulatory filings.”

Forrester said her client was prepared, and that made a big difference.

“We had the basic paperwork, including the company’s employer identification number, articles of incorporation and other ‘permanent papers’ to show it was legitimately organized and operating,” she said, adding the client’s QuickBooks records were also up to date.

Alternatives to banks

Banks aren’t the only institutions that offer business loans, said Kathleen Metz, vice president of commercial lending at Basking Ridge-based Affinity Federal Credit Union.

A credit union like Affinity focuses on local decisions for homegrown to midsize businesses. Affinity, Metz said, has a deep knowledge of the New Jersey market and “will do what’s best to benefit all our members and the communities we serve. We’re also in tune with member needs and industry trends.”

A business that’s buying machinery or equipment may also be able to get store or factory financing through an equipment lease or other asset-based financing.

“But always compare costs and shop around for interest rates,” said Kim Forrester, partner with Levine, Jacob, who also suggested careful review of application fees and loan terms to evaluate how they will affect cash flow, and to question whether the lender will want annual tax returns, or compiled, reviewed or audited financial statements. “For each level of engagement, the price goes up,” she said.

Finally, before committing the time and expense involved in applying for a loan, consider looking at some of your financial ratios, said Forrester.

“Each situation is different, but in general your debt-to-asset ratio shouldn’t be higher than 40 percent,” she said. “More than that is in the danger zone. And your current assets to current liabilities should be over a 1-to-1 ratio. Higher is better, and at least 3-to-1 is good.”

Besides making the bank more comfortable, the robust set of records saved the client some dough, she said.

“That’s because some banks require a compilation, review or audit of financial statements,” Forrester said, referring to different levels of accounting reports. And because the company’s QuickBooks and other records were in order, the bank did not require a compilation, which is generally the least expensive kind of report.

A compilation is generally limited to presenting financial information in the form of financial statements without any assurance of their accuracy. In a review a CPA will generally dig a bit deeper, trying to identify areas in the financial statements where material misstatements are more likely. An audit is the highest level of assurance service— and generally the most expensive — done by a CPA.

In an audit, a CPA will examine inventory and perform tests and procedures aimed at delivering a high — but not absolute — level of assurance about whether the financial statements are free from material misstatement.

“In this case, the bank saw good business practices, a good credit history and a good financial history with no bounced checks or other red flags,” said Forrester. “The fact that the company had a long relationship with the bank, and had previously taken out and repaid loans, also helped.”

Having a good handle on cash flow and providing reasonable profit-and-loss and other projections are also pluses, according to Maria T. Rollins, managing partner of Paramus-based KRS CPAs LLC.

“If you can demonstrate how the loan will add value to the firm and increase your productivity, the bank will likely be more comfortable with your application,” she said. “And keep communicating with the bank even after you get the loan. Let them know how things are going, good or bad, because having an honest relationship with your lender can mean a lot.”

The best time to apply for a loan “is when you don’t actually need it,” she said. “So even if your business is healthy, it may make sense to apply for a line of credit just to demonstrate your financial health.”

But if possible, keep away from issuing a personal guarantee for a business loan, said Forrester.

“If things go south and you can’t pay it, the lender may be able to go after your house, vehicle and other personal possessions. In some cases, like a business that’s organized as a sole proprietorship, you may have to give a personal guarantee, but it’s always worth exploring alternatives first.”

Email: dakscom@aol.com

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