Background

Loan underwriters judge risk by reviewing a company’s financial history and future plans. Over the past decade lenders have tightened documentation standards, so well-organized books and credible forecasts now carry more weight than ever. In my practice as a financial educator, borrowers who present reconciled statements, clear explanations for anomalies, and a short cover memo materially improve their approval odds.

How underwriters evaluate financials

Underwriters typically review:

  • Profit & loss (income) statements — to see revenue and recurring expenses.
  • Balance sheets — to evaluate assets, liabilities and owner equity.
  • Cash flow statements and 12-month forecasts — to confirm liquidity and repayment capacity.
  • Business and personal tax returns (usually 2–3 years) and bank statements — to verify reported income.
  • Accounts receivable aging, inventory schedules, leases, and debt schedules — to assess working capital and hidden obligations.

For deeper guidance on forecasting, see this FinHelp article on The Role of Cash Flow Forecasts in Business Loan Decisions. To understand what lenders focus on during a cash-flow review, see What Lenders Look for in Business Loan Cash Flow Analysis.

Step-by-step preparation checklist

  1. Reconcile and clean your books
  • Close the prior fiscal year, reconcile bank and credit-card accounts, and correct obvious miscategorizations.
  1. Produce standardized financial statements
  • Provide an audited or CPA-prepared set when possible; otherwise supply internally prepared profit & loss, balance sheet, and cash-flow statements for the most recent 12 months and year-to-date.
  1. Gather tax records and supporting documents
  • Include business and owner personal tax returns (usually the last 2–3 years), payroll reports, and major contracts.
  1. Create a 12-month cash-flow projection
  • Show month-by-month inflows and outflows and include key assumptions. Stress-test for slower revenue or higher costs.
  1. Prepare a debt schedule and collateral list
  • Itemize loans, payment amounts, interest rates, maturities, and pledged assets.
  1. Write a one-page cover memo
  • Summarize the loan purpose, use of proceeds, key financial ratios, and risk mitigants.
  1. Engage a professional
  • Use a CPA or small-business advisor to review statements, explain tax adjustments (owner compensation, nonrecurring items), and certify projections when appropriate.

Real-world examples (short)

  • Startup: A tech founder with limited historical revenue used a detailed 12-month cash-flow model and signed customer LOIs. Clear assumptions and supporting contracts convinced the lender to underwrite a small growth loan.
  • Established retailer: A store with volatile seasonality added an accounts-receivable aging report and a seasonal cash-flow schedule, which resolved lender concerns about short-term liquidity.

Who is affected/eligible

Small business owners, startups, and mid-sized firms seeking term loans, lines of credit, or SBA-backed financing must typically provide these materials. Exact requirements vary by lender and product.

Common mistakes to avoid

  • Unreconciled books or missing bank statements.
  • Overly optimistic projections with no supporting assumptions or contracts.
  • Ignoring owner compensation and related-party transactions.
  • Failing to explain one-time gains, losses, or tax adjustments.

Practical tips to improve approval odds

  • Keep rolling month-to-date financials and bank reconciliations ready.
  • Standardize categories (COGS, SG&A) so year-over-year comparisons are clear.
  • Show adjusted EBITDA where it helps explain cash available for debt service; explain any add-backs.
  • Provide ratio context: current ratio, debt-service coverage, and gross margin trends.
  • Prepare responses for common underwriter questions and include supporting documents (invoices, contracts, leases).

Documentation checklist (quick)

  • Last 2–3 years business and owner personal tax returns
  • Profit & loss and balance sheet (last 12 months + YTD), reconciled
  • 12-month cash-flow projection with assumptions
  • Bank statements (last 3–6 months)
  • Accounts receivable aging & inventory schedules
  • Debt schedule and major contracts/leases
  • Cover memo summarizing loan purpose and repayment plan

Brief FAQs

  • Which documents weigh most? Lenders focus on verified cash flow, tax returns, and bank statements.
  • Should I use a CPA? Yes — a CPA improves credibility and helps with adjustments and forecasts.

Regulatory and authoritative notes

  • Verify tax documents and allowable business expense treatments with the IRS guidance on business taxes (IRS: https://www.irs.gov).
  • For consumer-facing loan considerations and lender practices, see the Consumer Financial Protection Bureau resources (CFPB: https://www.consumerfinance.gov).

Professional disclaimer

This article is educational and does not replace personalized financial, legal, or tax advice. Consult a CPA or licensed financial professional for recommendations tailored to your situation.

Authoritative sources

Interlinks

In my practice, borrowers who follow the checklist above and include a concise explanatory memo shorten review times and reduce questions from underwriting teams.