What Lenders Require in Today’s Economy

In today’s tough economy, the availability of business credit remains tight. Financial institutions are cautious and highly skeptical of new lending requests. In addition to increased scrutiny regarding new relationships, bankers are also increasingly turning their focus to existing customers. With little or no notice, lenders are closing business credit lines or reducing the amount of available credit.

Banks are particularly focused on industry sectors that have borne the brunt of the recent recession, such as real estate (commercial as well as residential), construction, print media, restaurants and retail. Companies in these sectors, as well as businesses in general, should be prepared to respond to changes in their lender’s reporting requirements.

In order to receive or continue to receive credit from banks, companies should be aware of the types of financial statements that a bank may request:

  • Compiled statements. Provide no assurance that the financial statements are accurate, complete and comply with generally accepted accounting principles (GAAP).
  • Reviewed statements. Provide limited assurance that the financial statements are accurate. Typically, your accountant will review the statements to ensure that obvious errors or misstatements are corrected.
  • Audited statements. Provide the highest level of assurance that the documents fairly present the company’s financial performance consistent with GAAP.

In the past, compiled financial statements sufficed. But today, reviewed statements may be required. Consequently, reviewed statements may also be replaced with a request for audited statements. As the level of assurance required by the lender increases, so too can the associated cost to prepare statements. A close partnership between your company’s accounting department and your CPA firm is crucial to minimizing the cost and lead time associated with preparing financial statements.

In addition to the type of statements banks are requesting, the frequency of statement production is also changing. Interim statements that summarize a reporting period of less than a full financial year (typically quarterly or mid-year) are also being requested. To facilitate a lender’s request, your company’s accounting firm should be intimately aware of major changes in the company’s accounting processes, as well as the adoption or revision of your firm’s accounting systems. Regular communication with an accounting firm regarding the state of the company’s business can significantly increase the probability of a timely and accurate financial statement submission.

Banks are also scrutinizing the following aspects of requests for financial statements:

  • Significant customer reporting. If revenue is concentrated in a limited number of customers, banks will often ask for ad-hoc reports detailing the status of accounts receivable, unbilled revenue, as well as the overall profitability of the relationship.
  • Timely submission and confident presentation. Any undue delay in the production of financial statements can give bankers pause. “A day late and a dollar short” could result in the reduction or closure of a credit line. Planning ahead can ensure the timely submission of requested documentation. Regular meetings with your company’s accounting firm to discuss trends and the overall accounting processes can serve as a dress rehearsal for meetings with the bank.

If used appropriately, the burden of additional reporting can actually be used as a valuable financial management tool. By embracing the fact that financial statements are required, companies can actually improve their financial performance. Being required to produce more frequent and complex financial statements can result in a company having information at its fingertips that it may not have previously possessed. Access to credit is crucial to financial success. Companies must be prepared to satisfy bankers’ requests before they are made.