Make your financials bankable before applying for a loan

Clean the chart of accounts

A lender will scan your chart of accounts to see whether income and expenses are categorized consistently. Consolidate duplicative accounts and remove stale codes that no one uses. Map your chart to the tax return so lenders can trace revenue and deductions. Separate cost of goods sold from operating expenses to highlight gross margin trends. If you run multiple product lines, add tracking categories or departments to show margin differences. A tidy chart makes variance analysis straightforward and reduces clarification calls from underwriters.

Close the books on a tight schedule

Monthly closes that drag into the following month signal process gaps. Create a close checklist that assigns owners to bank reconciliations, revenue accruals, payroll entries, and inventory counts. Set a target close date, such as five business days after month end, and track actual completion dates. Publish close calendars for the next two quarters so stakeholders deliver inputs on time. A reliable close rhythm gives lenders confidence that your numbers are current when they review applications.

Reconcile cash, receivables, and payables

Unreconciled accounts raise immediate questions. Reconcile all bank and credit card accounts monthly and resolve differences that appear in suspense accounts. Match accounts receivable to customer ledgers and investigate aged items that exceed 60 days. For payables, ensure vendor statements match your ledger and document any disputes. Keep signed bank statements and reconciliation workpapers in a shared folder. Lenders often request these during underwriting to confirm liquidity and working capital accuracy.

Document revenue recognition policies

Revenue recognition varies by industry, and lenders want to understand timing. Write a short memo that explains when you record revenue, how you handle deferred revenue, and how you treat discounts or refunds. If you use milestones or percentage of completion, include examples. For subscription businesses, document churn calculations and how credits are applied. Clear policies reduce lender skepticism about revenue quality and help align projections with historical practices.

Tighten expense classification

Expense noise can mask profitability. Review the top 20 expense categories and reclassify items that belong elsewhere, such as software costs recorded as office supplies or contractor payments recorded as payroll. Flag any personal expenses that run through the business and remove them before providing statements to lenders. Standardize vendor naming so spend by supplier is visible for negotiation. Consistent classification produces cleaner margins and improves covenant forecasting once debt is in place.

Prepare GAAP bridges if you use cash basis

Many small businesses use cash basis accounting for taxes while lenders underwrite on an accrual basis. Build a bridge that converts cash basis statements to accrual, capturing receivables, payables, and inventory adjustments. Include notes on significant timing differences, such as annual insurance payments or prepaid software. If you rely on a tax preparer for the conversion, request a template you can update quarterly. Providing the bridge up front saves time during underwriting and demonstrates financial control.

Build a cash flow statement that ties out

Underwriters want to see how cash moves through the business. Prepare an indirect cash flow statement that reconciles net income to operating cash flow, then show investing and financing activity. Highlight non cash items like depreciation and stock based compensation if relevant. If you have seasonal swings, add a trailing twelve month view to smooth volatility. A cash flow statement that ties to the balance sheet and income statement shows lenders you monitor liquidity, not just profit.

Validate projections with driver assumptions

Projections without support look like guesses. Build a three statement model that connects revenue to operational drivers such as units sold, average contract value, or utilization rates. Link staffing plans to headcount costs and show how gross margin changes with scale. Stress test the model with downside cases and note the triggers that would prompt expense cuts or hiring pauses. Include a reconciliation between projected and historical margins. Lenders favor borrowers who can explain the path from today’s numbers to future results with concrete levers.

Address owner pay and distributions

Owner compensation and distributions affect cash flow and lender perception. Separate reasonable salary from discretionary draws and record them consistently. If distributions are high relative to earnings, be prepared to explain whether they will continue after the loan funds. For S corporations, document shareholder distributions and any planned changes once debt service begins. Showing disciplined compensation practices reassures lenders that cash will stay in the business to support repayment.

Build monthly variance analysis

Lenders ask how actual results compare to plan. Produce monthly variance reports that explain differences in revenue, gross margin, and expenses versus budget. Tag variances as price, volume, mix, timing, or one time items so patterns emerge. If marketing spend spiked, connect it to pipeline or closed deals. If payroll ran high, note hiring dates or overtime drivers. Keep a log of corrective actions taken after each review. Demonstrating that you detect issues quickly and respond with specific steps signals strong financial discipline and improves confidence in your projections.

Anticipate lender follow up questions

Underwriters probe areas that look unusual or risky. Prepare short memos on customer concentration, related party transactions, and any large adjustments in the financials. If you experienced a one time disruption, such as a facility move or cybersecurity incident, summarize the cause and remediation. Having concise answers ready shortens email chains and shows you have already thought through risk mitigations.

Assemble a lender ready data room

Package your work into a structured folder before you send an application. Include three years of financial statements, interim statements year to date, tax returns, bank reconciliations, accounts receivable aging, accounts payable aging, debt schedules, and your projections. Add policy memos on revenue recognition and accounting methods. Label files with dates and versions so underwriters can follow along. A clean data room shortens underwriting cycles and positions you as an organized borrower who can manage debt responsibly.