Many Self Employed people will spend good money on an Accountant to help them show as little income as possible through deductions & different accounting methods. This helps greatly when it’s time to pay taxes. This hurts when it’s time to go for a loan. If you are showing a very low income, telling the lender “I really make much more than that, but it’s not on the tax returns” won’t help. Lenders take the approach if it’s not on the tax return, it didn’t happen. After all, how are they supposed to get a comfort level that you really did make more, and how much? So they only consider what the return shows. They may add the annual figures you have listed for depreciation and amortization back to income, that’s about it.

About the only thing you can do to combat this disadvantage is to keep your credit strong with a high credit score. The higher your credit score, the more likely lenders will put less weight on your returns. That is not a cure all, but lenders will get a lot more motivated and have more programs and workaround solutions available if you have a 725 credit score with low income reflected on your Tax Returns as opposed to a 625 credit score with low income reflected on your Tax Returns. If you know that in a year or two your company will need to obtain loans, discuss this with your accountant. This is an important reason for showing income on your Tax Returns. Consider how much you will borrow, and how much the monthly payments will be for. Based on that, use your accountant’s advice on how much you should show in annual income to show a lender that you can meet all your monthly obligations plus the additional monthly obligation of the loan they are considering. This is extra work and hassle, but if the loan you need down the line is important, do it.

If you are a Corporation, it is likely that your returns show close to zero net income. This is what is supposed to happen, as it is common for corporations not to end up reflecting an income. Ironically, many lenders ask for the corporate returns and decline requests due to “insufficient cash flow”. In such a case, you should provide your personal tax returns also, since they will show income and strengthen your loan request

Personal Financial Statements

Lenders may request for you to complete a Personal Financial Statement, especially for larger loan requests. A Personal Financial Statement, in addition to tax returns and income verification, are among the most common ways for lenders to quickly take a look at your financial situation.

The primary things lenders look for on Personal Financial Statements are:

1) What is your liquidity? Liquidity means what you list for cash on hand, in checking & savings accounts, money market accounts, 401K retirement plans, Certificates of Deposit, listed Stocks (Listed means listed on the New York Stock Exchange or American Stock Exchange as opposed to stock issued by a non public company not listed on one of the above exchanges.

2) New Worth This is your total assets less your total liabilities. What lenders commonly look for is things most people list as personal property such as furniture, artwork, furnishings, collectables, jewelry, household items, as well as overvalued Real Estate, and deduct these from the total of your assets. The lenders believe should you default on a loan, they really cannot and have no interest in repossessing these items and trying to sell them for pennies on the dollar, so the completely deduct them from your asset value.

Most people over-value their real estate holdings, both personal and commercial. Lenders know this, will assess the value you listed and quickly discount it by 10% to 20%, or more, depending on what value you list for your home.

Depending on what you are applying for, they will then make an assessment of how you look financially, and based on the product and loan criteria, weigh your liquidity and Net worth into their decision.

Although a good New Worth is important, your liquidity is most important. Lenders see this as a secondary source of repayment. If you run into a problem financially, having a money market account or savings account will allow you to easily make a payment on a loan as opposed to simply not being able to make that payment. If you do not have cash in an account, it will be much harder for you to come up with a payment if you run into a problem.

Income verification & Tax Returns

A lender may request verification of your income via a paystub or a tax return. If you are employed by someone, providing a paystub is easy and satisfies the request. If you earn part of your income in commissions or bonuses, provide your most recent Tax Return, since the total income will be higher, making it more likely you will be approved. If your previous year has a higher income, provide the last 2 years returns because the average will be higher. The only exception to this is if the most recent year is substantially lower than the previous year. If that is the case, you don’t want to provide the previous year because it will look like your income is going down!

                        Apply for a Small Business Loan Today!

                 More about our Capital For Businesses Program!