Business Loans and the Impact of your Tax Return

If you own a business, now is the time to sit down with your CPA and/or trusted advisors to formulate a plan for next year and the year after, and the year after that. What you do on your taxes this year will have an affect on whether or not you qualify for a loan over the next few years.

You need to plan for next year, the year after that and the year after that, because those are the tax returns that I need to review to assist you in getting a loan in 2011. Three years worth of business and personal tax returns will be my first request. I will be looking for the profitability of your business. I realize that anyone who owns a business wants to reduce their tax exposure, but please keep in mind that reducing your profitability will, in most cases, either reduce your ability to get a loan or the amount that you will qualify for. Will you be looking to expand, buy equipment, or buy your building in 2010 or 2011?

I had a client discuss a business loan with me recently. I knew him to have sizeable accounts with my bank and to manage his accounts wisely. During our discussion I asked the client if his tax returns would tell me a good story about his business. He responded that while his returns would not show a loss, they would not show much profit. When I asked him how long he had been running his “nonprofit”, he responded with the comment that his business is very profitable, but that his tax returns were carefully constructed so as not to expose him to a great deal of tax.

I bet you cannot guess what my first reaction was to that statement. The first thought that came to me was that this man is less than honest. Do I have any reason to think that he would treat me and my bank any differently? Reasonable deductions, research and development and accelerated depreciation make sense, but we really do look to see what else is in there. Second reaction was, how would I justify making a loan to a business that does not seem to make any money? How would they repay the loan? I cannot just take you at your word that you are profitable. Hmmm, that reminds me a little of what recently happened in another loan industry. Let’s not do that.

Long gone are the days of the one page business loan application. If your bank is still making loans, they will require all of the information that is necessary to make a good decision. The bank should also be looking to see if this loan will allow you to be successful. Your loan officer should review your numbers to make sure that this is not just a “finger in the dyke”, but an obligation that will give you the opportunity to continue to be successful.

Many loans are not being completed, because at a certain point in time, the bank comes to the conclusion that this is an “emergency repair” on a business that has declining sales, declining customer base or declining profits. The loan would only put an obligation on the borrower that could not allow him to be successful. If the business cannot survive, then the last thing you want to do is encumber what you have and lose it. It is not in the best interest of the bank to have this happen either. We really do not want to own your home because your business failed.

Planning will allow you to create a map for the next few years. Each year the plan should be reviewed and adjusted for current conditions.

With a little planning, you and your banker can make a great team!

Pamela Carson is a Business Development Officer for Discovery Bank. She can be reached at pcarson@discovery-bank.com , or 858-413-4300