More than one-half of all small-business loan applications are being rejected by banks, according to the Biz2Credit Small Business Lending Index. In such a tough lending environment, companies in need of capital might find lenders more receptive if they invest in audited financial statements.
"We've had clients who needed these statements to even get the loan, and it can make a difference in the interest rate you get," says David G. Barbeito, a principal in the Miami office of Morrison, Brown, Argiz & Farra, a large independent accounting firm.
A study by Michael Minnis, assistant professor of accounting at the University of Chicago Booth School of Business, published in the Journal of Accounting Research found that companies with audited financial statements have interest rates that are nearly three-quarters of a percent lower than companies that do not. In general, large companies are more likely to require audits in order to receive loans; however, Minnis found that firms with annual revenue of $10 million were not always asked to supply such materials, while firms in the $500,000 range sometimes were.
Audited financial statements are expensive, in the ballpark of $15,000 to $20,000 for the smallest businesses and $50,000 to $75,000 for middle-market businesses, estimates Eric Martinez, CPA, an auditor with Jericho, N.Y.-based accounting firm Grassi & Co. So it's important to do the math before hiring an auditing firm to pore over your books. In some cases, a review by an auditing firm may be all that is necessary, yielding the same lending benefits at about half the cost.
"One of the first things you need to do is to talk to the banker and understand what they're looking for. A lot of times, we're able to achieve the bank's objectives with a reviewed statement," Martinez says. He recommends business owners make sure the bank is comfortable with the auditing firm in advance, as the bank may have standards of expertise that the auditor needs to meet.
Minnis agrees that a cost versus benefit evaluation is important before incurring the expense of audited financial statements, particularly if a loan approval is not at stake. Still, audited statements may have other benefits to business owners, such as helping them establish larger and more favorable lines of credit with suppliers or meeting the management review requirements to attract outside investors.
This article originally posted on Entrepreneur.com
