Ask The Banker
by Debi Enders
No one likes to pay taxes. But sometimes small businesses that work to keep their tax bills as low as possible may unwittingly hurt their chances of being approved for loans that they need.
How does this happen? When a small-business owner applies for a loan, a bank asks to see both the owner’s personal financial statement and the business’s income tax returns. The tax returns are critical because they provide proof of the income a business has earned. Bankers need this information to assess a borrower’s ability to repay a loan.
“But wait,” some small-business owners may say. Tax returns don’t tell the whole story. Some owners – often those with cash businesses – acknowledge that not all of their income is accounted for on their returns. Others say their returns show little or no earnings because they maximized their deductions to lower their tax burden. The government, in fact, helped them by offering attractive special deductions on some purchases in recent years.
But here is the important thing that every small-business owner needs to know: From a banker’s perspective, tax returns are the official last word. If they show that a business has no earnings, the business has no earnings. And a business that has no earnings will likely find its loan application denied.
So what can you do? Avoid disappointment with planning. If you expect to seek a loan in the next three years, make sure your accountant knows. Accounting strategies that are great for lowering taxes can undermine your ability to obtain a loan. A good accountant can devise a tax strategy that enables you to depreciate your assets while still positioning your business to finance new equipment, expand your operations or manage fluctuating cash flow. Your banker can also provide guidance on what to do before you apply for a loan. Just ask.
Debi Enders (debi.enders@commercebank.com) is assistant vice president, small business banking at Commerce Bank.