How Banks Use BUSINESS Tax Returns
Banks will often ask for the most recent tax return filed by the business borrower. Most banks will ask for the full set of compiled, reviewed, and the very rare audited financial statements from their business borrower. They prefer financial statements because their credit analysis is built around financial statements.
There are exceptions to this. If the banker is willing and the financial statements are internally prepared, the business tax return becomes the lead informational document. And, of late, banks are looking at tax returns in addition to financial statements. If your business has borrowed post financial crisis, I suspect you already know banks are asking for more documentation as part of the credit approval process.
In a credit request, the bank's main objective is the make certain the borrower has the intent, and the means to pay back the loan principal and the interest. Intent speaks for itself. Means usually equates to sustainable free cash flow to service the debt during its term.
Absent compiled, reviewed, or audited financial statements, the banker must compute the free cash flow using the tax return. It's doable; I teach bankers how to do this. I put forth it's prudent that you know how this is done.
May I suggest this approach. As a business owner, your relationship with your lender will be strengthened commensurate with your knowledge of your business finances. The better prepared you are, the better your chances of getting what you want from the bank. And, I suggest your loan request will process faster when you calculate free cash flow on your own before making the request. This preparation includes anticipating what the bank is looking for.
I've put together an Excel based template that shows you what the banker is looking for within your business tax return. The template can handle Form 1120 ('C', regular corporation), Form 1120S ('S' corporation, and Form 1065 (Partnership and a multiple member limited liability company choosing partnership taxation). It also computes business net cash flow using the techniques your banker uses. And, it creates a list likely follow-up questions the banker will ask, and your suggested response!
Interested? For more information, click on the side menu item TOOLS For The Business Owner.