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Does showing a profit dramatically help businesses get loans?

The vast majority of business owners want to show the lowest profit they can on their financial statements and tax returns in order to have the lowest tax liability possible.

However, the primary reason they may in fact want to show a profit on their tax returns is if they see the need to secure financing 2 or 3 years in the future.

Very few business owners consider this point and very few Accountants tell their customers to consider future financing requirements.  One of the main reasons few Accountants will discuss showing a profit on the tax returns with their customers, is because it is clearly a very unpopular subject, since the consequence is a higher tax liability.    Accountants feel if they suggest the benefits of reflecting a profit, which will mean paying higher taxes that year, their customer will look for another Accountant.

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But is not discussing this in the long term interest of the customer?

There are several reasons not discussing this can significantly hurt the customer.

If the customer decides to get a business loan or some other type of business financing, their financials will in many cases be requested, especially if the requested amount is higher, over $50K to $75K, though sometimes even as low as $20K or $25K.   Once the financials are requested, the chances of an approval after having submitted 2 Years Tax returns that show a low net income, or even a loss,  are very low.     The customer will very likely be declined for insufficient cash low, among other reasons.

For a business that is finally in the position to expand, enter new markets, hire additional staff, increase their inventory or advertising, all of which is designed to bring in additional revenue, this can be devastating.    These are really the biggest long term goals of any business.   Since a very high percentage of businesses intentionally show a low net income or loss, these business owners will be taking by surprise down the road when their financials and tax returns are requested and they are declined for business financing due to insufficient business income and insufficient cash flow.

As a result, business owners that know that working capital and financing will be critical in the next 2-3 years should report a healthy net income on their business returns.

More Small Business Loan resources:

Public Radio Planet Money – All issues money related to the public.

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