It is a good practice to spend some time each year to review and update your business records. When you apply for a loan you don’t want any surprises. If you make it a regular practice to review these ten parts of your business records, you will have a much easier time applying for a loan and as important, you will be practicing good business.
1. Accounting records
Next to having the ability to repay a loan, lenders are often as concerned about the accuracy of accounting records. Keep a set of interim financial statements, including an accounts receivable and accounts payable aging (that match the interim financial statement balance sheet) for each month end or quarter. Keep a set of end of year statements for the last three to five years. If you have the ability to make these into a PDF file and store them on a server or desktop computer, they will be easily accessible for email or delivery on a CD-Rom.
2. Organizational records.
Keep all records in a safe place. In today’s world, it is good to keep a PDF copy of them on your computer so they can be emailed when necessary. For a sole proprietorship, this would be any business license and assumed name certificate. A corporation should keep original and copies of a) articles of incorporation b) certificate of incorporation, c) corporate bylaws (up to date), corporate minutes, and copies of all corporate resolutions. Limited liability companies (LLC) and partnerships have similar documents though they may be called by a different name. If you need to secure a copy of a corporate document filed with the Texas Secretary of State’s office, you can obtain most of them online.
3. Shareholder personal financial statements
Nearly all lenders will want to see a personal financial statement for any shareholder that owns more than 20% of a company. The rule of thumb most lenders use is if the personal financial statement is less than six months old and has not materially changed, it is acceptable. If your shareholder’s personal financial statements are old or if things have materially changed (for better or worse) take the time to complete a new one. Generic forms or forms from nearly any bank are often acceptable to many lenders.
4. Answering lender questions about your business
Today’s loan officer needs to know you can operate your business safely and weather tough times. Many of them will ask you questions to see if you have a strong knowledge of how well your business is doing from an analytical standpoint. Ideally you should know how to read your financial statements, know the importance of some of the key metrics found in your statements, and have a few answers available without looking at your financial statements or worse, asking your bookkeeper. Some important things to know are: a) year to date gross sales; b) year to date gross and net profit; c) current accounts receivable balance; d) current accounts payable balance; e) who are your top five customers are and what percentage of sales each represents; and f) projected annual sales for the current year. Having your finger on the pulse of your company’s important benchmarks and goals is a practice that separates high performing companies from all others.
5. Personal credit reports
Whether you are a consumer or business owner you should check your personal credit reports from the three main credit reporting agencies. Experian, Equafax, and TransUnion all report credit information a little differently. The most effective way to dispute any incorrect information is to buy each credit report separately from each of the credit reporting agency. The reason is each of them make it easy to dispute errors online on their own website when you have purchased them separately. The most important things you are looking for is derogatory information that shouldn’t be attributed to you. Getting these errors fixed can take 60 to 90 days and if you are going to apply for a loan you don’t want to wait until your credit reports get straightened out. If you find errors or have issues with credit grantors reporting, contact each of the reporting agencies and use their formal process to fix them. Also, take the time to update the demographic information about you on the credit reporting agency websites so each will match. This should be done by anyone who is a 20% or greater owner in a business.
Management should keep easy to find proof that all necessary taxes and governmental reports have been filed and that the company is in good standing. Every time you pay IRS 941 taxes, make a copy of the receipt and keep it in a file. Keep copies of all 941 tax reports as well. Keep them for at least three years and be able to get to them easily. Scanning proof of tax payments into a PDF file is a good practice. Keeping copies of Texas Franchise Tax reports and proof of payment with the same tax records is a good idea.
7. UCC financing statements
Secured lenders file a Uniform Commercial Code form (UCC-1) when you borrow money. This form is commonly referred to as a UCC-1 form. It is kept with the Texas Secretary of State Corporate Records Division. Once a year check the Secretary of State’s website and search for UCC-1s that have been filed by your secured creditors to protect the collateral you used to borrow against. It is very inexpensive to conduct this search and you will always know your company’s status with secured creditors. When you pay off loans, make sure your secured creditors terminate their UCC-1 filings.
8. Business description
Keep a smartly worded one page description of your business. This is especially important when your business is complex or unique. You want to include a brief description of your business, the types of products or services you provide, the names and titles of your key personnel. Also highlight a few points that make you stand out among your competitors.
Lenders and possibly even customers may want to see resumes of your management team and major shareholders. Keep these single page “highlight” resumes up to date. Focus on the domain expertise each key management team member has for your business.
10. Budgets / cash flow forecasts
Having a 12 month rolling budget and a 13 week cash flow forecast is valuable both for managing your business as well as managing your cash. Businesses that know how to budget and manage their cash flow are far more attractive to lenders than those that don’t.