An In-Depth Look at The Profit & Loss Loan: A Loan for Established Business Owners
One of the most difficult things business owners run into when trying to get a loan is providing their income to lenders. Most banks require income documentation with tax returns, but because savvy business owners take many valid deductions on their tax returns, their tax return often does not show their true income.
Some lenders offer alternative documentation on loans that cater specifically to business owners and self-employed professionals.
For years, the main alternative to tax return loans has been the Bank Statement Loan in which the business owner's cash flow is used to qualify him or her.
Though this is a great alternative which I will cover in an upcoming article, it can be relatively cumbersome for some more sophisticated business owners. If you have a large business, or even multiple businesses, the documentation can become complex since you need to show 24 months of bank statements per bank account, and many large businesses have 4 or more bank accounts.
If you have 2 accounts, that's 48 bank statements and every transaction is looked at with a magnifying glass. For example: you need to explain every non-sufficient funds charge, every large deposit, etc...
The dream of such a business owner would be to simply show a picture of his business to the lender and for the lender to approve him just on that alone on the spot!
Does that exist?
Yes, it does! it is called the Profit & Loss method of qualifying!
Instead of showing bank statements or tax returns, the Business Owner asks his CPA, Tax Preparer or Enrolled Agent (it has to be a licensed accounting professional) to prepare a Profit & Loss Statement for the last 12 months.
The lender is not interested to see the tax implications of this P&L. He, like you, just wants to see whether your business is profitable or not and to what extent.
The beauty of this Method of Qualifying is that most businesses that are run professionally, already have the ability to print a P&L at their fingertips! Most accounting software packages have this option. It only takes a couple of keystrokes!
All that is needed is for your CPA, Tax Preparer or Enrolled Agent to review it, sign it, date it and voila! You saved yourself and the lender hours and hours of retrieving and analyzing tax returns or bank statements, countless questions,—in short, at least two weeks of meticulous work!
P&L loans can be completed in as little as 3 weeks.
In terms of timing of the P&L:
If you apply for a loan during the first quarter of 2024 or any first quarter, all you need is the preceding 12 months’ P&L, that is to say 2023 at the time of this writing.
If you apply past the first quarter, in this case past March 31st, you are going to need a trailing P&L in addition to the 2023 P&L.
It doesn't matter if you have not filed your 2023 corporate taxes, only the 2023 P&L is required. This saves you time and money.
The P&L does not need to be audited, only reviewed and signed by your tax professional. In addition the tax professional needs to prepare a letter stating certain basic information about your business.
The lender would still require that we run your credit report and that your mid FICO score is at least 680.
We often help our clients achieve the needed score by doing a soft credit pull, analysis and advice on what debts to pay down or eliminate, etc. In this manner, and at no charge to the client, we routinely increase credit scores between 30 to 100 points!
P&L Loans are best suited for:
an established business with at least a 3 years track record
stable or increasing income
with professionally managed accounting by a licensed tax preparer
with a corporate structure in good standing & up to date
business license in good standing
the owner having at least a 5 year track record in the same professional activity
In short if your business is established, you could obtain a mortgage either to buy a primary residence or investment property with minimal paperwork, less hassle, great speed at competitive rates and get a 30 or 40 year mortgage. Note that the interest rate on a bank statement loan is a little bit higher than on a tax return loan, and the interest rate on a P&L loan tends to be a tad higher than that of a bank statement loan.
The P&L loan makes sense for business owners who value speed of completion of the loan, and time saved in not having to document detailed aspects of your business and finances for the lender. I have a number of clients that this is applicable to, and I do these loans on a regular basis.
The Profit & Loss Loan is a great tool for higher-level business owners, especially if your time is worth more than the possible savings you could get by documentation through bank statements or tax returns. Also, the P&L loan can be a great way to get the financing you need for a project when it is impossible or extremely difficult for you to qualify through either bank statements or tax returns (such as when your income is spread over many bank accounts or businesses that would only raise more questions from lenders).
If you would like to see how this type of loan would play out for your situation, or what kind of mortgage would make sense for you, feel free to schedule an appointment and I will be happy to brainstorm options with you to help you achieve your goals.
