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October 15, 2009

Lending in the Recovery: Three suggestions to help you say 'yes'

No more excuses…the 2008 returns are here!

In October, the 2008 returns will finally be filed by all individuals (including sole proprietorships, one-owner LLCs, S Corp shareholders and LLC/Partners filing 1065’s). When you can get the 2008 returns, you’ll be dropping from ‘history’ the oldest tax return you usually use.

Do you use the latest 3 years? That will now be 2006 (pre-recession), 2007 (just getting started) and 2008 (well into the recession for many businesses). Your 2009 year-to-date financial statement may not look so great, either.

Do you use the latest 2 years? Much worse! You’ll be using 2007 and 2008 tax returns and considering 2009 year-to-date financial statements.

Stuck with the bad numbers until 2012!

And if you follow along this path too long, you’ll realize that we’ll be stuck with recession era tax returns (for businesses struggling part or all of the way through 2009) through the end of 2011!

We are using the worst of the recession years to try to justify the business loans needed to ramp up for the recovery!


  1. Add one year to the number of year’s tax returns you use. If two years, move to three. If three years, move to four.
  2. Include year-to-date financial statements in your averages if that is the basis for your assertion that the business is improving.
    • You may need to request a higher-level statement. If you usually accept borrower-prepared you may require CPA-prepared. If you usually accept CPA-compiled, you may need to request CPA-reviewed. (Yes, I know that will cost your borrower money. But what will it cost them if you decline the loan?)

    • If your borrower is telling you that the major improvement in their operating results is coming toward the end of the year, consider requesting the year-to-date broken out by quarters. This will allow you to show the upswing you are considering as a major factor in the loan decision.

    • If your guidelines do not allow for including year-to-date information in your averages, do this as a side-calculation and use the results in your written write-up.

  3. Expand your write-ups. It is likely you will be making more assumptions about the upturn based on conversations with the borrower, observations about improved business conditions in your geographic area for that industry, and other factors that do not come directly from financial statements or tax returns. Written commentary will be essential to ‘sell’ the loan recommendation to the decision-makers or explain the loan decision to the regulators.

Do you see this as a challenge? What are you and your financial institution doing to gear up for the improved business environment and your need/desire to lend in the face of historical cashflow calculations that will not support current loan requests?

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Linda Keith, CPA

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 www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.

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