When you apply for a business loan, line of credit, or equipment financing, your bank will almost always ask for recent financial statements. For many owner-managed companies in Richmond Hill, Markham, and across the GTA, we prepare those statements through compilation engagements, a cost-effective alternative to an audit or review. At HSM LLP, we prepare compiled financial statements for clients every year, and we see firsthand how the presentation of those statements can shape the way a lender reads an application. Knowing what a credit analyst focuses on helps you put your strongest financial picture forward before you sit down with your bank.
How Lenders Read Compiled Financial Statements
Compilations typically contain no assurance. Lenders are aware of this. The Canadian standard on compilations, CSRS 4200, states that the accountant has not audited or reviewed the information; therefore, the accountant cannot issue a compilation engagement report. However, compiled statements are useful to lenders. In many cases, lenders use compiled statements for smaller loans. Lenders usually accept CPA-compiled statements. Compiled statements usually show a reasonable degree of uniformity because they follow a standard format, and they often include a note disclosing the basis of accounting used. Lenders usually focus on the basis-of-accounting note because it shows how you prepared your financial figures (i.e., cash or accrual basis) and lets them compare your performance to similar businesses.
Lenders also read your statements with your corporate tax returns, bank statements, and loan applications. When the statements align with the other documents, your loan application moves forward quickly. When your statements don’t align with your other documents, credit analysts will request additional explanations and/or documents before approving your loan.
Key Details Lenders Review in Your Statements
Credit teams look past the bottom line. They want to see whether your business generates enough cash to repay the loan and whether your balance sheet can absorb a slower year. When reviewing compilation engagements, lenders commonly focus on:
- Revenue and gross margin trends over two to three years
- Debt service capacity and existing loan obligations
- Working capital, including receivables and payables
- Shareholder loans and amounts owing to related parties
- Retained earnings and owner withdrawals
Unusual items draw attention. A large shareholder loan, a sudden drop in gross margin, or inventory that does not match prior years can each prompt follow-up questions. Year-end adjustments such as accruals, amortization, and properly recorded liabilities help the statements reflect your actual financial position, which is why we review entries with clients before finalizing their statements.
Lenders also read the notes. Details on long-term debt, lease commitments, and related party transactions help them assess obligations that may not be obvious from the main statements. Clear, complete notes reduce guesswork and show the lender that your financial reporting is organized and dependable.
Preparing Your Business Before You Apply
Timing is important. Statements covering your most recent fiscal year are preferred, and older statements may require an explanation for interim numbers. Up-to-date bookkeeping speeds year-end compilations and provides current numbers for financing.
Consistency also plays a role. Lenders can analyze year-to-year comparability more easily when statements are prepared using the same methodology. Unexplained changes from one year to the next may create uncertainty for the lender and slow the credit decision process.
Context often helps in making a determination, and this is no different for a lender. A well-thought-out loan application that outlines the desired financing and its impact on the business often helps the lender make a decision. Our forecasts and projections service provides management’s future view and helps the lender understand cash flow and the impact and timing of loan repayment.
Some lenders, particularly for larger amounts or as part of a loan agreement, may require a review engagement or audit. If your financing needs are increasing, we can assist you to determine if a review engagement or audit would be prudent prior to your bank requesting this.
Compiled financial statements remain a valuable financing tool for smaller, owner-managed business, as long as they are accurate, current, and clearly presented. Our Partners are involved in every file. We work with our clients to ensure their financial statements tell a clear, consistent story reflected in their tax returns and loan documentation. Contact us at our Richmond Hill office to discuss your year-end compilation or to engage us before your next financing request.
