While not everyone has a December 31st year end, most small and medium businesses do, and with the middle of January quickly approaching, here are some things to consider with respect to business financing and year end financial statement preparation.
Keep in mind that this advise applies to any fiscal year end.
Whether we like it or not, the process to secure capital is largely driven by the historical financial statements of the business. And financial statements that are less than 6 months old have more lending value than those greater than 6 months since the end of the last completed fiscal period.
And while the required filing of corporate income tax and the related financial statements is typically not required until 6 months after the year end is completed, there may be significant reason to get this completed sooner. Here are two reasons in particular to consider. You need incremental financing for your business or you’re planning on requiring more business financing in the near future.
The first thing to consider is the profitability of the income statement and the leverage of the balance sheet. If the income statement shows profit capable of servicing incremental debt and the balance sheet has enough equity to support additional debt acquisition, the you will have a powerful asset to assist with securing capital once the financial statements are completed.
Here’s some other things to consider.
If you’re applying for financing after year end but before the year end financial statements are completed, then its highly likely that a lending facility will not be put into place until the accountant gets the statements finalized and filed.
If you plan to wait until the financial statements are completed 6 month after the year end before applying, remember that the financial statements are now effectively 6 months old. If the lender’s assessment process takes some time to complete, the lender may turn around and ask you to get a 6 month interim financial statement completed, creating what could be a significant delay to your plans while increasing your accounting costs.
Even if you have no immediate need for incremental financing, you may want to consider how to best utilize a strong financial performance of the year past in terms of business finance and the relate costs.
For one example, you could utilize a strong year end to help leverage better terms at your bank by shopping around to the competition. Rarely will you have better leverage to secure better rates and terms that when you have strong financial statements. And you may even be surprised at the competitive offers that come back which may prompt you to make a move. With out freshly prepared financial statements from a strong year of operating performance, this possibility is going to be a lot less likely.
Another situation to consider is leveraging a set of strong financial statements to increase your credit limits or add credit lines. You would be basically trying to secure financing you don’t need or are not planning to use but may end up using if you’re having an off year. For a seasonal business, this scenario can play out more often than not over a long enough period of time.
I had a client with a seasonal business that was highly profitable and dependent on winter weather. They had great credit and had very well established short term and long term financing with a chartered bank. Then one year there wasn’t severe enough winter weather for their business to operate (first time in over 20 years of business history). At that moment of cash flow crisis, it was not possible to borrower more money and everything that was built up over the years was put in jeopordy.
You’d think that a bank or any lending partner could see past this anomaly in financial performance. In most cases they can’t or won’t, so its up to you to create your contingency ahead of time and one way to do so is by increasing your available credit when the opportunity presents itself.
On the flip side, if the financial statements are not going to be profitable, there is likely no rush in getting them completed sooner than later. And if the bank requires copies, you may want to wait as long as you can so that the business results can improve prior to providing the historical results.