What a lender is actually evaluating
A bank is not reading your financial statements to admire them. It is testing three things: whether the business generates enough repeatable cash to service debt, whether the reported numbers can be traced to source records, and whether management understands its own financial position well enough to answer follow up questions without guessing.
For contractors, the second and third points cause more delays than the first. Plenty of profitable contractors stall in underwriting because job costs, receivables and payroll are recorded in ways nobody can reconcile quickly.
Profit and loss statement
Prepare a profit and loss statement for the most recent two to three fiscal years plus a current year to date period. Revenue and direct job costs should be presented consistently across every period. If the chart of accounts changed mid year, be ready to explain the restatement.
- Revenue separated by work type where the business manages it that way, for example retail, insurance restoration and commercial
- Direct job costs split into labor, materials, subcontractors and equipment
- Labor burden included in job cost, not buried in overhead
- Overhead presented separately from direct cost so gross margin means something
- Any owner discretionary or non recurring items identified clearly
Balance sheet
The balance sheet is where lenders find the problems. Every material account should be reconciled and supported by a schedule, not just a balance carried forward from last year.
- Cash agreeing to reconciled bank statements
- Accounts receivable agreeing to the aging report
- Accounts payable agreeing to the payable aging
- Inventory or uninstalled materials, where the business carries them
- Fixed assets with a depreciation schedule
- Loans, notes, leases and lines of credit agreeing to lender statements
- Payroll liabilities agreeing to payroll reports and filings
- Clearing, suspense and undeposited funds accounts cleared or explained
- Equity, distributions and any shareholder loan activity documented
Cash flow information
Provide a statement of cash flows for each historical period presented. Reconcile net income to cash generated so the lender can see how much reported profit actually converted into money. In contracting, the gap between the two is usually receivables and work in progress.
Accounts receivable aging
An aged receivable report by customer, with current, 30, 60, 90 and over 90 day buckets, is a standard request. Be prepared to explain concentration, meaning any single customer representing a large share of the balance, and to identify amounts that are disputed, on hold pending insurance, or effectively uncollectible.
Accounts payable
An aged payable report shows how the business is managing supplier and subcontractor terms. Stretched payables next to healthy reported profit is a signal that underwriters notice quickly. Include retainage payable separately where it applies.
Debt schedules
Prepare one schedule listing every obligation: lender, original amount, current principal balance, interest rate, monthly payment, maturity date, collateral and any personal guarantee. Include equipment loans, vehicle notes, capital leases, merchant cash advances and any related party debt. If the business cannot produce this in a day, that alone slows the process.
Historical financial statements
Most lenders want two to three years of history plus interim statements. The interim period should be prepared on the same basis as the annual statements. If the annual figures were adjusted by a CPA at year end and the interim figures were not, the comparison will look inconsistent and you will be asked about it.
Bank reconciliations
Every bank and credit card account should be reconciled through the most recent completed month, with reconciliation reports available. Stale, forced or unexplained reconciling items make the rest of the package hard to defend.
Job and WIP information
Where the business runs jobs that span reporting periods, expect questions about work in progress. A WIP schedule showing contract value, approved change orders, costs to date, estimated cost to complete, percentage complete and over or under billings tells a lender whether reported revenue is earned or borrowed from the future.
Even for shorter cycle residential work, a job level margin report and a backlog summary help explain how the next several months of revenue are expected to arrive.
13 week cash forecast
A rolling 13 week cash forecast is not a required lender document everywhere, but it is one of the most persuasive things an owner can bring. It shows expected collections, payroll, material purchases, subcontractor payments, debt service and overhead week by week, and it demonstrates that management is planning liquidity rather than reacting to it.
Why unreliable books delay financing discussions
Underwriting slows down when the numbers cannot be traced. Unreconciled balances, payroll posted in a single lump with no job allocation, deposits recorded net of processor fees, duplicate customers and jobs, and balance sheet accounts that have not moved in years all generate follow up questions. Each round of questions adds weeks.
The cost is rarely a formal decline. It is a financing conversation that quietly loses momentum while the opportunity that required the capital moves on.
When cleanup should come first
If several of the items above cannot be produced from the current accounting records, a lender ready package is not the right first project. A targeted financial cleanup should come first so that the statements presented can be defended line by line. Presenting a package built on records you cannot support is worse than presenting nothing yet.
- Multiple months of unreconciled bank or credit card activity
- Balance sheet accounts with no supporting schedule
- Job reports that do not agree with the profit and loss
- Payroll liabilities that do not agree with filings
- Opening balances carried forward from a migration nobody validated
Important disclosure
Contractor Plus Books does not provide loans, act as a lender or broker, and does not guarantee financing approval. We help organize, reconcile and review the financial information commonly requested during lender conversations.
Want this reviewed against your actual numbers?