Conventional Lending

July 09, 2023

by a searcher in Houston, TX, USA

Hello,

I understand SBA lending require tax return numbers to be match the PnL. Is this the case with conventional lending, or will a Quality of Earnings be used to underwrite the deal?

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Reply by a professional
from University of Houston in Houston, Texas 77002, États-Unis

Look at the cash balance per the following: the financial balance sheet, the statement of cash flows, the bank statements, and (if available or required) per the tax return's balance sheet. Depending on the size of the business and whether a corp. there will even be a reconciliation of book to tax income filed with the tax return. Beginning and ending cash balance for the year should match on all statements. That's a simple check.

The difference between accrual and cash basis accounting is simply timing. This is what the statement of cash flows proves and is the reconciliation of cash in/cash out for accrual basis accounting.

Additionally, the business should be able to ask their tax accountant for book to tax Reconciliations if not required to file with the tax return.

QofE is to strip out non ordinary and unusual accounting practices, i.e. to prove out the quality and reliability of the numbers reported and to bring the financials into compliance with GAAP (or whatever the required basis of accounting is)

As long as you can bridge tax to book, you should be OK.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I agreed with Heather. If they report their taxes on a cash basis but the keep their books on an accrual basis, so long as they have good internal reporting and we can verify everything with a QofE, we can use the accrual based financial statements. We have a deal moving forward right now under this same scenario and we are doing that deal with SBA financing.

However, if they taking cash in and it does not show up in any records anywhere or both the taxes and financials are done on either a cash or accrual basis, it is going to be impossible for a lender (whether SBA or conventional) to verify that cash flow.

I hope this helps. We would be more than happy to have a conversation and take a look and see what might be able to get done. You can reach me here or directly at redacted Good luck.

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