Lenders typically assess a company’s financial health and stability before approving a loan, and tax-related information provides valuable insights into the financial standing of the business. Here are some ways in which business taxes are important in the loan application process:
1. Income Verification/Cash Flow Analysis: Tax returns help to verify the income of the business and to analyze the Cash Flow of the business. This helps them assess the ability of the business to generate consistent revenue, which is crucial for loan repayment.
2. Debt-to-Income Ratio: Business tax returns provide information about the company’s debt obligations. Lenders use this information to calculate the debt-to-income ratio, which is an important factor in determining the business’s capacity to take on additional debt.
3. Risk Assessment: Business taxes can reveal the financial risks associated with the business. Lenders assess the consistency of income, potential tax liabilities, and any outstanding tax issues that may affect the financial stability of the business.
4. Legal and Regulatory Compliance: Lenders want to ensure that the business is in compliance with tax laws and regulations. Non-compliance can signal financial instability and may impact the approval of a loan. Let me also add that most lenders will need a filed Tax Return instead of an Extension.
5. Documentation for Small Businesses: For small businesses, especially those without extensive financial statements, tax returns serve as crucial financial documentation. They provide a comprehensive overview of the business’s financial performance.
IMPORTANT NOTE: TYPICALLY, WHEN APPLYING FOR A SMALL BUSINESS LOAN ALL LENDERS WILL ASK FOR THE MOST CURRENT 3 YEARS OF TAX RETURNS. HAVING THESE ON FILE IS A “BEST PRACTICE.”
In summary, business taxes are essential for lenders to assess the financial health, creditworthiness, and risk associated with a business. Providing accurate and up-to-date tax information can enhance the chances of loan approval and influence the terms and conditions of the loan.