Show An Accurate Balance Sheet to a Prospective Lender

By Phil Scruton, Certified Business Analyst
Small Business Development Center at Palm Beach Community College

phil scrutonThere isn’t a lot of business lending going on right now, as most entrepreneurs have noticed.  But there is a little bit, and it behooves applicants to do the very best job they can when submitting business plans to lenders for consideration.

Part of any business plan requesting funding is a coherent balance sheet.  Profit and Loss statements don’t seem to present as much of a challenge.  But balance sheets, being widely misunderstood by non-accountants, are often difficult to interpret – even if they have been prepared by accountants.

First a brief primer:  Balance Sheets show what is owned and owed by a business at a moment in time, usually at the end of a month or quarter.  What’s owned is described in the Asset half, while what’s owed is described in the Liability half.  The Liability half is made up of two sub-sections.  Current and Long Term Liabilities comprise the first sub-section.  Owner’s Equity comprises the second.

Here’s what we don’t want to see in the Asset section:

— Negative cash accounts. It’s true that outstanding checks at the end of the month can generate a negative number that doesn’t really mean there is a negative balance in the cash account.  But lenders have no patience with this sort of thing. If necessary, factor in deposits to bring the account above zero.  Make an adjustment to reflect the actual account balance on the last day of the month or quarter, if necessary.

— Loans to the owner listed as an asset. When the owner takes money from the business, it’s a distribution of profit, not a loan.

— Unsupportable Goodwill. Either have documentation that suggests a tangible, supportable value for Goodwill — usually a nebulous account at best — or get it off the Balance Sheet.

Here’s what we don’t want to see in the Liability section:

 — Substantial Loans from Stockholder This account measures how much money the owner has put in on a short term basis to make up short term deficits. Lenders see that figure and assume two things: One, that the owner has a wretched business and two, that the owner will take at least a portion of the loan proceeds and pay himself or herself back.

The latter is forbidden, while the former is a good way to appear unsuitable for a loan.  Move that excessive Due To Stockholders amount to Owner’s Equity and regain the loan amount through the success of the business.  If you can’t do that, your business application is actually an attempt to “borrow” repayment and that’s a species of fraud.

Unpaid Federal payroll taxes, unpaid state unemployment taxes, and unpaid Sales Tax that extend beyond the due date If those amounts are on the balance sheet due to sloppy bookkeeping, clean it up.  If these accounts show actual overdue debts to taxing authorities, you can forget about a loan. 

Discrepancies between the year-end Balance Sheet and the Balance Sheet page of the Federal tax return There are legitimate reasons for discrepancies in profit figures — often generated by the 50 percentdeduction for meals and entertainment. But these are reconciled in Schedule M-1 of the business tax return. Un-reconciled discrepancies are a problem that turns lenders off.

You would think that turning your bookkeeping over to an accountant would take care of these problems. But ask any lender or business coach: Errors on professionally prepared Balance Sheets are not rare. 

Part of putting your best foot forward in hopes of getting a loan is taking responsibility for your financial statements. Telling a confused lender that “The accountant messed up” is kind of like telling an elementary school teacher that “The dog ate my homework.” 

It didn’t fly then. And it won’t fly now.

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Columns from the Small Business Development Center appear every week in Palm Beach Click here to read the previous column.

Phil Scruton is a Certified Business Analyst at the Small Business Development Center at Palm Beach Community College. His areas of specialization are marketing, financing and accounting. Phil also operates an accounting business for personal and small business accounting. Phil graduated from New York University. He then spent several years as a professional musician before beginning a stint with Knight Ridder newspapers as a reporter and assistant city editor. He resides in Boca Raton. He may be reached by email.

florida small business development center at palm beach community collegeThe Small Business Development Center at Palm Beach Community College is part of a national network that has more than 1,100 business development centers nationwide and is a member of the Florida SBDC Network and ASBDC. The SBDC offers one-stop assistance to individuals and small business by providing a wide variety of information and guidance. To find out more, visit its website or call 561.862.4725.

The Small Business Development Center is partially funded by the U.S.
Small Business Administration. The support given by the U.S. Small Business Administration through such funding does not constitute an expressed or implied endorsement of the co-sponsor(s)’ or participants’ opinions, products or services.


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