Bank loans

Tax season is the best season to prepare clients for bank loans

Business owners and managers are showing increased interest in growth strategies this year. With Paycheck Protection Program funding in the past, traditional banking and lending is back in vogue according to analysts who say loan applications will surge in 2022. Tax season is an opportune time for CPAs and accountants to consult with clients who may need business loans. .

As a former CPA turned business owner of a niche lender, I have unique insight into what a CPA sees and hears from growth-seeking clients, and what an underwriter needs to see. to make recommendations related to loan applications that fuel growth. Whether a client is considering expansion through a merger, acquisition, or some other method, knowing their future business intentions means using a broader lens during tax season. Here are some questions to consider when processing tax returns for clients with growth strategies.

1. What capital is needed to sustain growth? Whether in a tax package or in conversation, ask clients about their future business plans while helping with tax preparation. If growth is a goal, offer to support their efforts with a financial review as well as cash flow forecasting and analysis for the growth initiative to determine the cash needed to fuel that growth.

Underwriters need to see forecast reports with proposed fixed and variable costs, as well as a break-even analysis that supports the loan application. If a loan is needed for working capital, it is essential for the analysis to show how the money will be spent. Why? A loan team’s job is to review financial data to determine risk when deciding whether the requested loan amount will be repaid.

2. Is financial data ready for bank reviews? The loan repayment risk analysis includes a thorough financial review. During the loan review process, the client may need to provide up to three years of historical financial data. Chances are some or all of these documents have been reviewed or managed by your company. If you recently inherited a client’s books, offer to review the financial statements before sharing the documents with a bank’s underwriting team.

A zero to low bottom line strategy may not be in a client’s best interest if they are seeking a loan. Some business owners try to maximize their expenses to reduce the net amount, thereby reducing the taxes owed. A business owner will post expenses on their books, such as a boat or lake house that they say they use to entertain customers. When in a hurry, the truth is that they only use the asset once a year for trading purposes.

Bankers see unexpected expenses, scratch their heads and ask, “Is this real? Tax season is a good time to reclassify non-essential business expenses and explain why in the following context. Bankers need to see the cash flow to feel confident that the requested loan will be repaid. During the loan process, lenders carefully consider not only the financial aspects but also the character of the business owner. How finances are managed can be an indicator of an overall management style and fiscal responsiveness to a company’s growth and fiscal strategy.

3. How is the company structured? Although changing the corporate structure does not affect 2021 taxes, help a client think through their future business strategy with respect to potential tax implications. The organizational structure of the business is especially important if an owner is considering selling the business. For example, if a succession plan involves private equity, a C corporation may be the best option.

Most business owners choose a flow-through entity because there is a level of taxation with an eligible business income deduction, which can give business owners up to 20% deduction on their business income. intermediary company.

4. Is customer growth hesitant? We often receive questions from clients about future tax laws. We all wish we had a crystal ball to make smarter business decisions, but we don’t. The reality is that if we waited for lawmakers to discuss, debate and vote on laws affecting our taxes, we would all be crippled in perpetuity. If you hear similar questions from your clients, remind them not to hold the future of their business hostage while waiting for the tax code. I learned that the best way to run a business is to stay focused on the business plan.

During tax season, most clients look to their accountant to help navigate the complexity of tax rules to ensure that returns reduce liability and accurately reflect the financial statements for the year. Uncovering client needs, such as future expansion or succession plans, and tailoring services to strategically support their success and growth, can change a client’s perception from tactical accountant to trusted strategic advisor.