Tax Season is the Best Season to Prepare Clients for Bank Loans

February 8, 2022 Oak Street Funding

As posted on Accounting Today.

Business owners and managers are showing an increased interest in growth strategies this year. With PPP funding in the past, traditional banking and lending are back in vogue according to analysts who say loan requests will pick up steam in 2022. Tax season is an opportune time for CPAs to consult with clients who may need business loans.

As a former CPA turned business owner of a niche lender, I have unique insights into both what a CPA sees and hears from clients looking for growth and what an underwriter needs to see to make recommendations related to loan requests that fuel growth. Whether a client is considering expansion through a merger, acquisition or other method, knowing their future business intention means using a wider lens during tax season. Here are some questions to consider while processing tax returns for clients with growth strategies:


How much capital is needed to support growth?

Whether in a tax packet or during conversations, ask clients about their future business plans while assisting with tax prep. If growth is a goal, offer to support their efforts through financial review along with forecasting and cash flow analysis for the growth initiative to determine cash needed to fuel such growth.

Underwriters need to see forecast reports with proposed fixed and variable costs, along with a break-even analysis that supports the loan request. If a loan is needed for working capital, showing how cash will be spent is essential to the analysis. Why? A lending team’s job is to review financials to determine risk when deciding if the requested loan amount will be repaid.


Are financials ready for banking reviews?

Analyzing risk related to loan repayment includes a thorough financial review. During the loan review process, the client may need to provide as much as three years of historical financials. Most likely all or some of these documents have been reviewed or managed by your firm. If you’ve recently inherited a client’s books, offer to review financials prior to having documents shared with a bank’s underwriting team.

A zero-to-low, net bottom line strategy may not be in a client’s best interest if they’ll be shopping for a loan. Some business owners work to maximize their expenses to drive down net, thus reducing taxes owed. A business owner will run expenses through their books, such as a boat or lake house they say they use to entertain customers. When pressed, the truth is they use the asset once a year for business purposes.

Bankers see unexpected expenses, scratch their heads, and ask, “Is this real?” Tax time is a good time to reclassify expenses not critical to the business and discuss why in the following context. Bankers need to see cash flow to feel comfortable the loan requested will be repaid. During the loan process, lenders are carefully considering not only financials but also a business owner’s character. How financials are managed can be an indicator of an overall management style and fiscal responsiveness to a business’s growth and tax strategy.


How is the business structured?

While changing business structure will not affect 2021 taxes, help a client think about their future business strategy as it relates to potential tax implications. Business organization structure is especially important if an owner plans to sell the business. For example, if a succession plan involves private equity, a C corporation may be the best option.

Most business owners choose a flow-through entity because there is one level of taxation with a qualified business income deduction, which can give business owners up to a 20% deduction on their flow-through business income.


Is the client growth hesitant?

We often get questions from customers about future tax laws. We all wish we had a crystal ball to make smarter business decisions, but we don’t. As a business owner and former CPA, the reality is if we waited for legislators to discuss, debate and vote on laws affecting our taxes, we would all be paralyzed in perpetuity. If you’re hearing similar questions from your clients, remind them not to hold their business’ future hostage waiting on the Tax Code. I’ve learned the best way to run a business is to stay focused on the business plan.

During tax season, most clients are looking to their accountant to help them through the complexity of the tax rules to ensure returns reduce liability and accurately reflect the business year’s financials. Uncovering client needs, such as future expansion or succession plans, and tailoring services to strategically support their success and growth, can change a client’s perception from tactical accountant to strategic trusted advisor.

Rick Dennen
President And CEO, Oak Street Funding

About Oak Street Funding
Indianapolis-based Oak Street Funding, a First Financial Bank company, provides customized financial solutions for businesses in various industry sectors and third-party loan servicing for financial institutions. Oak Street Funding incorporates industry knowledge, easy-to-use technology and exceptional employees to deliver top-quality service and capital products to niche businesses nationwide. With in-house sales, underwriting, and servicing teams, and direct access to the CEO and executive team, Oak Street Funding is well-positioned to meet lending needs of borrowers in all stages of the business life cycle.

Media Contact:
Rae Hostetler
Hostetler Public Relations
Representing Oak Street Funding

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