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.

The Recasted Income Statement

Generally speaking, 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.

After the 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.

Specific Purpose

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.

Conclusion

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.