Overview

Lenders rely on profit and loss (P&L) statements as a core input when underwriting small-business loans. A clear, accurate P&L shows whether a business earns enough to cover operating costs and debt service. Underwriters combine the P&L with tax returns, bank statements and credit to form a complete risk picture.

(Authoritative sources: IRS recordkeeping guidance and CFPB small-business lending resources.)

What lenders look for

  • Trends in revenue and profit: consistent growth or stable patterns beat volatile one-off spikes.
  • Gross margin and net margin: show product/service profitability after direct costs and expenses.
  • Cash flow vs accounting profit: lenders focus on cash available to pay debt (timing matters).
  • Seasonality and volatility: documented seasonal swings that are explained in notes or year‑to‑date (YTD) schedules are treated differently than unexplained drops.
  • One-time items and add-backs: lenders will remove nonrecurring gains or discretionary owner expenses when calculating normalized earnings.

How lenders verify and reconcile P&Ls

  • Tax returns: Lenders typically reconcile P&L figures to filed tax returns (Schedule C, Forms 1120/1120S) because taxes are third‑party verified.
  • Bank and merchant statements: Used to confirm deposit patterns and gross receipts.
  • Financial statements prepared by an accountant or using accounting software (QuickBooks, Xero) increase credibility.
  • Site visits or interviews for small commercial loans may be used to confirm operations.

Common underwriting adjustments

  • Owner compensation normalization: converting owner draws or inconsistent salaries to a market salary for cash-flow calculations.
  • Add‑backs: adding back noncash charges (depreciation) or one-off expenses to show adjusted EBITDA.
  • Personal expenses removal: subtracting personal items paid through the business.
  • Conservative revenue recognition: lenders may apply haircuts to revenues (for example, 5–20%) when income appears volatile or unverified.

Key metrics lenders use

  • Debt Service Coverage Ratio (DSCR): net operating income divided by debt service — common threshold is >1.2 for many lenders, though requirements vary by product.
  • EBITDA or adjusted EBITDA: used to measure operating earnings available to service debt.
  • Gross margin and trend analysis: to detect margin compression.

How to prepare P&Ls that pass underwriting

  1. Keep timely, accurate books and separate business and personal transactions.
  2. Provide 12–36 months of P&Ls when requested and include YTD monthly detail for the current year.
  3. Reconcile P&Ls to tax returns and supply bank/merchant statements to back deposits.
  4. Annotate seasonal patterns, one‑time events, and any accounting changes so underwriters understand trends.
  5. Work with an accountant to prepare a standardized Profit & Loss and an adjusted-EBITDA memo showing add‑backs and normalizations.

For a practical checklist on documents lenders prioritize, see our guide on Preparing Financial Statements for a Small Business Loan Application. To understand how cash flow factors into underwriting decisions, read How Lenders Assess Cash Flow for Small Business Loans. If you need help packaging numbers, our article on Building a Business Loan Proposal: Financials Lenders Really Want has step-by-step tips.

Quick examples (illustrative)

  • A restaurant with steady 10% YoY revenue growth and stable 60% gross margin is more likely to qualify than one with erratic receipts and similar average profit.
  • A contractor who documents seasonality and supplies signed customer contracts for future work strengthens the case that revenue dips are temporary.

Common mistakes to avoid

  • Mixing personal and business expenses on the P&L.
  • Failing to explain one-time losses or gains.
  • Not reconciling P&L figures to tax returns and bank deposits.

Professional disclaimer: This article is educational and not individualized financial or legal advice. For decisions about financing, consult a qualified CPA, small-business advisor or lender.

Sources: IRS small-business recordkeeping (irs.gov), Consumer Financial Protection Bureau small-business resources (consumerfinance.gov).