Is Your Financial Statement Telling the Whole Story?

If you have been following this article series, you know by now, guidelines can vary drastically from capital provider to capital provider.?The way they calculate your financial strength is no different.?But this is one area that they almost universally agree, you must have at least a 1:1 ratio between the loan amount and your net worth and some level of liquidity as a reserve.?During the initial screening of the request, the only documentation they have to calculate this is your financial statement, so it is important to make sure it is as accurate as possible.?

I want to point out a few areas in which we typically see borrowers shortchange themselves which may make a lender think you aren’t as strong as you know you are.?First, let’s tackle the items that can help your net worth, but typically get omitted or underrepresented:

1. Liquidity, show ALL accounts that you have ownership in (but just your percentage), even if they are in an entity account, pensions, retirement, etc.
2. For real estate values, use the value that you would sell it for.?We see financial statements come in with the Zillow value or the Tax Assessed Value used, these are generally under market.
3. Include Life Insurance Cash Values, Accounts Receivables, and vehicles (and yes, your toys too!).
4. If you are involved in a 1031 Exchange and the cash is with the exchange company, be sure to show that as a liquid asset.

Secondly, here are some items we see modified by an underwriter that can lower your net worth:

1. Closely held business value – these always get cut, mainly because there is no way to independently verify the real value of that asset, it is better not to rely on it to meet the net worth requirements.
2. Debts incurred by a closely held business get omitted but, if you guarantee that debt and it shows up in a credit report, it needs to be included in your liabilities.
3. For real estate, only include your percentage of ownership for both the value and the debt so that it factors into the net worth calculation correctly.

If you work with me, there will usually be some back-and-forth discussions about your financial statement to make sure it is accurate and we are presenting the best possible picture to the available capital sources.

Michael Coffee | Capital Advisor | [email protected] | 503.866.8817