A Tale of Two SBA Loan Denials (and How to Avoid the Same Fate)
October has arrived, and with it, all of the creepiest and most gruesome CFO Horror stories are coming out of the woodwork.
I spend most of the year trying to make finances friendly and accessible. But in October, I shine a light on the terrifying tales I’ve encountered in my decades as a CFO with the hope that you and your business can avoid the same fate.
This year’s CFO Horror Stories are back with tales of two SBA loan applications gone horribly wrong.
So, pull up a seat at the campfire and get ready for chills, because these are sure to send a shiver down the spine of any hardworking business owner.
First: A Tale of Tax Accounting Gone Bad
I recently was working with a client who was turned down for an SBA loan — not because the business wasn’t a fantastic candidate — but because the tax preparer was so aggressive about keeping the company's tax burden low that they turned a profitable business into an unprofitable business for tax reporting purposes. 😱
Listen, paying taxes is no one’s idea of a great time, but being profitable is a VERY GOOD thing for your business! And at the end of the day, paying taxes is PROOF (to a banker) that your business is making money and can repay the loan.
Most tax advice focuses on paying as little as possible. And while I’m all in favor of saving $$ wherever you can, taxes are simply a reality of being successful in business. Its better to plan to pay taxes than to avoid it completely. Also, submitting incorrect numbers on your tax forms is fraud and the IRS definitely doesn't like that! Consequences can be dire.👿
To qualify for an SBA loan or other funding, you will need the government-backed proof of your profit that your tax documents provide.
Oh, by the way. Do you know another time you need your tax returns as proof of your company’s value? When you want to sell your business! Under-reporting profits to the IRS literally subtracts cash from your sales price.
Even though paying taxes feels more like a trick than a treat, maximizing profit truly matters. That’s why I recommend shifting your mindset around taxes if you want to set your business up for future success.
Looking for ways to take the sting out of paying taxes? Check out this post on Avoiding Tax Injury.
Tale #2: The Horrifying Truth About Bad Bookkeeping
In addition to showing tax documents as proof of your profitability for an SBA loan or to a potential buyer, you also need to have your books in order to get funding or the highest possible valuation.
Recently, I also learned about another company that was trying to grow by acquiring another business. They applied for an SBA loan to finance the purchase – which is a common way to fund a small business acqusition...
Unfortunately, this loan application got turned down because their balance sheet was a huge mess! 🤮
That’s right, shoddy bookkeeping stopped the growth of this business by killing their ability to get the funding to acquire a second company.
How to Avoid These Fates and Secure an SBA Loan for Your Business
Many business owners outsource their bookkeeping or have someone on their team who handles their books.
In fact, we provide this service to many clients.
No matter who does your books, as the business owner, you still must look at your financial reports every month and make sure they make sense. This is one important way to check that you do indeed have meaningful numbers.
What exactly are meaningful numbers?
Meaningful numbers are
Accessible
Accurate, and
Up to date!
Plus, (and here’s the key), they are understood. Financial reports should provide you, the business owner, with information that is useful and easy to act on.
This is why my #1 tip for business owners looking at financial statements is: If you don't know or understand: ASK!
Meaningful numbers prevent you from falling victim to bad bookkeeping OR misguided tax filing because you know enough to ask questions when something’s not adding up. (Pun intended)
Avoiding both of these fates will set you up for future success and growth — whether your success looks like getting an SBA Loan, selling your company, or pursuing other opportunities that are only possible for profitable businesses.
For a deeper dive into meaningful numbers and how to create them check out Your 4-point Path to Meaningful Numbers and Clear Financial Reports.