What can you do to improve your credit worthiness and get the credit you need?
If you’ve paid any attention at all to the news recently,
you are well aware of the country’s current credit crises. The gross liquidity
that was available just a few short years ago, to nearly any borrower is now
only being offered to those with elite financial positions and stellar credit
ratings. The government has made repeated attempts to loosen the credit
liquidity, however, with mixed and limited results. Most experts predict the
credit crises will loom at least into the immediate future, which leaves most
in the business world wondering, “What can I do to improve my credit worthiness
and get the credit I need?”
Most accounting issues for privately
held businesses have centered on tax liability reduction in the past. That
emphasis has shifted for now. To achieve the ratios desired by finance
professionals and bank personnel, businesses must have higher incomes and carry
more assets to gain access to credit. In order to get credit, companies must be
able to do three things: 1) have recasted financial statements and be able to
show solid profits, 2) carry more assets, and 3) create and convey a specific
purpose for the funds.
Recasted Income Statement
most accounting for closely-held businesses focuses on the tax return with the
ultimate objective of reducing taxes. The reason closely-held businesses file
tax returns is simple, it’s required by law. From a financial perspective, or
perspective that accurately reflects reality, the tax return does not show a
good financial picture of the business.
On the other hand, few closely-held
businesses create what are known as true value financial statements. Financial
statement principal and disclosure rules are not required under law for
closely-held businesses, as are tax returns. Accordingly, only a few
closely-held companies carry them. Publically traded companies are required to
have financial statements, if they intend on marketing their stock to the
public. The goals of financial statements are to reflect the true reality of
the finances of the company and therefore, are used to present a better and
accurate picture of a company’s finances in order to obtain loans and promote
investment by banks and investors respectively.
A recasted income statement is a
presentation of the company’s finances to represent a more optimistic picture
than traditional tax accounting statements present. The accountant preparing
the income statement will remove non recurring expenses, family salaries, investment or other nonoperating expenses or income to
family members to the extent possible. In effect, a restructured income
statement presents a more realistic income picture of the business which a
banker can use to justify a loan.
income statement is recast, the business person can determine if the recasted
income statement is enough. If not, the owner can find ways to increase income
further such as trimming expenses. The added efforts generally will beget more
income shown on the recasted statement. It should be remembered that the recasted financial statement is not to be
used for tax purposes, but can be used for financing purposes.
Recasted Balance Sheet
As with a recasted income statement, a
recasted balance sheet should also be presented. The goal of a recasted balance
sheet is to show a banker that you have real assets that can be used as
collateral by a bank and gives the banker a comfort level. When recasting the
balance sheet, assets are revalued at their fair market value, inventory is
presented at replacement cost, and loans made to the company by the owner can
be written off or subordinated if doing so would not constitute bad faith.
In many instances, due to taxes,
expenses are written off that affect the balance of assets that are shown on
the books of the company. Accordingly, if expenses are adjusted (as stated
above for income statement purposes) these adjustments will also affect the
assets on a balance sheet. An example of this is I.R.C. section 179. In a
situation that was just reviewed, a company wrote off $100,000 in expenses and
lowered the assets on the balance sheet. A recasted balance sheet should put
the $100,000 worth of assets back on the books as the tax deduction distorts
both the income statement and the balance sheet.
Banks also like to
know what you intend on doing with the money they loan to you. A specific
purpose assures the bank that the money will not be frivolously spent while the
business gains no advantage to repay the bank. In order to present a specific
purpose to the bank, it is likely the bank will require a specific statement of
what the funds will be used for. In addition, the bank may even require a full
blown business plan for use of the funds. Either way, you should be able to
present the bank with an accurate intention of how the funds will be used.
Finally, the company should also have a
definite plan as to how the funds will be paid back. This entails a projection
as to the months that funds will be available to pay back principal on the
loan. Another statement that assists in presenting this information is referred
to as a cash flow projection.
The current economic
downturn is one of the worst since the 1930’s. Even though the country suffers
from the credit crises, credit is still obtainable. With the right help and
professional assistance, credit can be found and at the right price. The
professionals at The Center routinely aid those trying to get financing, value
their business, sell their business, or plan for business succession and/or
exit strategy. Contact the experts at The Center if you need assistance in the
restructure of your financial statements for bank purposes.
For more information, visit the Center for Financial, Legal and Tax
Planning Inc. website, www.taxplanning.com.
Getting Financing In Tough Times
April 23, 2009