Alex Lipyanik, Vice President of Commercial Lending at QNB Bank, agreed to talk to me about a topic he frequently discusses with his customers and an area in which many business loan applicants can improve: the importance of having timely and accurate financial statements. Below is a summary of our conversation.
What types of things should a business owner be prepared with when getting ready to apply for a loan?
Every loan is different, and it really depends on what you’re looking for and why. Regardless, the bank wants to know as much about you and your company as possible. A forward-thinking loan applicant will come prepared with a business plan and projections. This is often an area that business owners don’t put a lot of effort into but gives credibility to the loan request.
The bank also wants to see the most current financial statements and/or tax returns readily available as well as interim statements to support the more recent activity.
Another highly valued piece of information is a business debt schedule that breaks out who you owe and the future payment schedule.
What are the bank’s perceptions when an applicant is not able to provide timely and accurate financial statements?
“It is obviously a red flag as a lender. When you ask the bank for money, you are asking them to be part of your business,” Alex explains. One concern is that you may not know where you really are as a business. For example, the business could have been trending down for the last six months but if your most recent financial statements are messy and not reconciled you wouldn’t know that. The lender could be concerned that this loan request is just a band-aid for a larger problem that you may not even know about because you aren’t looking at your financials. That could be perceived as “throwing good money after bad” and the bank will be more reluctant to lend.
Another perception may be concerns about potential fraud. Alex shares that one of the Five C’s of Credit is Character. Having messy financial statements could indicate to a lender that the business owner may not be telling the truth about the state of their business.
The timeliness of the financial statements is also a key indicator. If we are halfway through 2023 and you don’t have final numbers for 2022 yet, then a lender would be forced to look back at 2021. Alex explains, “I can’t lend money based on 18 months ago; anything could have changed, especially now when businesses have had such a volatile few years as a result of the pandemic.”
What other red flags do you see with lending?
Alex begins by saying, “Open communication is the key to success. The bank does not like to be blindsided.” If you have an issue that could be concerning, be prepared with an explanation. Establishing an open and proactive relationship with your banker will benefit you in the long run. Be sure to keep them updated on important information such as key employee turnover or any changes that might impact your sales and bottom line.
Having timely and accurate financial information will enable you to do this. For example, if you have loan covenants that must be met annually, you can use your quarterly financial statements to track the covenants through the year. This gives you time to adjust your spending if it appears that you may not meet the covenant and, if that is not sufficient, you will have plenty of time to talk to your lender in advance and explain why you may not meet your covenant this year.
Being prepared and maintaining open communication are the keys to a successful relationship between a business owner and their lender. Alex stresses, “We want to get through it together and open communication is the key to that.”