A lender asks a prospective borrower about an item or a trend he or she noticed while reviewing the business's financial statements. The business owner can't provide an explanation and without hesitation replies, "I'll ask our accountant for an explanation."

Sounds like a reasonable answer, doesn't it? In the mind of the lender, it's not. What the lender hears is, "Let me ask my accountant what is happening with my company, because I sure have no idea." What's more entertaining in this anecdote is that the borrower's accountant probably doesn't have an adequate answer for the lender's questions either, and he or she likely will refer the lender back to the borrower.

Unless your accountant is also your CFO or a controller, he or she, in most cases, simply takes your QuickBooks numbers (or other software you may use) at the end of the year, puts them into a tax return or compiled financial statement, and conducts very basic reconciliation. He or she does not know what is behind those numbers and the changes from year to year -- but you should.

Lenders expect that you will be able to sit down and discuss changes in your company's financials in detail, and generally have very little tolerance for small-business owners who cannot explain significant fluctuations. The majority of questions lenders will ask you about your business financial statements will have nothing to do with accounting or with your accountant. They are about what caused those numbers. Simply, they are about your business.

The types of questions lenders are likely to ask will pertain to trends and individual items on your statements, including:

  • Significant changes on your balance sheet, such as increase or decrease in accounts receivable, inventory, or accounts payable.
  • Significant changes on your income statement, such as fluctuations in revenue, gross and operating profits, rent, salaries, and many others.
  • Significant changes in owner's distribution (cash withdrawals) from the company.
  • Significant difference from what is typical for your industry, for example, considerably more cash on hand or investments in equipment in excess what is common for your competitors.

"Significant" means a sizeable change in both dollar terms and as a percentage of the total. The best way to notice those changes is by placing two or three years of income statements or balance sheets side by side and look for the changes. Note that lenders pay more attention to deterioration and signs of a weakening financial condition than to positive changes, and for good reason. The lender is concerned about loan repayment, as you should be, too.

Knowing the above doesn't mean you always will have the answer. However, it will minimize the times you have to say, "Can I get back to you on that?" Anticipating a lender's questions by focusing on what was discussed above will give you a head start. It will show your lender that you know your business, which is key to showing that you are serious about your loan request.