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Five questions to ask in 2010 to make the loan!

I predict the 2009 tax returns will be filed earlier rather than later. Why? The congress has liberalized the rules for carrying back Net Operating Losses. If the business paid taxes in any of the prior 5 years, they can carry back the loss to any of those years. Tax refunds anyone?

If that is the case for some of your business borrowers, you will soon be including 2008 and 2009 in your analysis, the worst years of the recession. So here are your questions:

  1. How do you (or will you) qualify a borrower for a business loan
    when the two or three most recent year’s tax returns or financial
    statements do not support the loan request in terms of required debt coverage ratio and other financial requirements?
  2. How do you distinguish a business that has done poorly from a
    business whose owner chose to forgo profits to keep their business
  3. If the business owner chose not to pay themselves during the downturn in order to keep their staff, continue to market in a downturn and otherwise keep the business as strong as possible, how will that impact your analysis of them as a guarantor? (They may not ‘qualify’ even if their business is now doing well and back to paying them.)
  4. What compensating factors are going to make up for a recent two
    or three year’s financial performance that is not sufficient to qualify
    for the loan?
  5. Are loans to continuing businesses going to need to be assessed more like loans to start-ups?

What do you think?

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.