The Importance of a Strong P&L Statement When Seeking a Business Loan
25 Jan, 2016 / Comments: Comments Off on The Importance of a Strong P&L Statement When Seeking a Business Loan / By William Mahnic
As a small business owner, you are likely constantly looking for ways to make your company more profitable. One way to do this is to use a small business loan to put towards investing in your business, whether through hiring new employees or purchasing new equipment. However, obtaining a small business loan is easier said than done, as many factors go into whether or not you can meet the criteria for one. That being said, one solid way to ensure that you can snag a small business loan that has favorable terms is to make sure you have a healthy Profits & Loss statement to show lenders that your company is running smoothly. Let’s take a look at the importance of a strong P&L statement in obtaining a small business loan.
What is a Profit and Loss Statement?
A profit and loss statement is a type of financial statement that states your company’s costs, expenses, and revenues during a particular period, typically one fiscal year or fiscal quarter. It is also sometimes known as an income statement or an income and expense statement. The P&L statement gives banks information that shows exactly how your business is generating profits by reducing its costs and increasing its revenue.
Why the P&L Statement is So Important to Lenders
When applying for a small business loan from a bank, the SBA requires that you provide a profit and loss statement within three months of turning in your loan application. Non-traditional lenders will also be interested in seeing this report, as it provides them with evidence of both current and historical profitability, as well as shows them your company’s cash flow and how able you are to repay your loan.
What’s the Difference Between a Cash Flow Statement and a P&L Statement?
A lender may ask you to provide both these statements. Although they are both related to one another, they also contain key differences. The P&L statement is based on accruals, whereas your cash flow statement is created on a cash basis. One statement feeds the other; as they are interrelated; you must add back the non-recurring items and non-cash to obtain your P&L. However, a P&L statement is more useful to lenders as it gives them a clear picture of what your business’s operations look like at any given revenue and expense level over a particular period.
How Much Time Should Your P&L Statement Predict?
In general, it is recommended that you show small business lenders a P&L statement that projects between one and three years. If you are applying for a small business loan through a bank, then the SBA requires that you provide three years’ worth of financial statements. You should create a month-to-month P&L for your first fiscal year, and then a P&L for year two and three that goes quarter-by-quarter.
How to Know if You Have a Strong P&L
Lenders will want to see that your P&L statement is strong. Otherwise, they may be hesitant to lend you a small business loan. Some warning signs of a weak P&L to look out for it if you have increased sales, but declining profits, increasing non-variable expenses like salaries, rent, and utilities, stagnant sales or rising cost of goods sold. If you have any of these issues, then you may have a hard time taking out a loan from a traditional lender. It is recommended that you obtain benchmarking information to figure out if you have an appropriate amount of profits, which you can get from the Small Business Development Center, as well as D&B industry reports.