SBA 7(a)

searcher profile

January 08, 2025

by a searcher from University of California, Los Angeles - UCLA Anderson School of Management in Los Angeles, CA, USA

How have folks dealt with seller tax returns reporting very low operating income for tax management purposes vs. much higher actual operating income? It seems like all SBA lenders are focused on tax returns for financials so trying to understand how to get credit for higher actual operating income to improve funding capacity. Any input will be appreciated!

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. There are three issues that can drive this. The first issue is that they report their financial statements via a different accounting method than the tax returns (accrual versus cash). The second is that they are under reporting on their tax return to avoid taxes. The third is that they are running lots of personal expenses through their tax return to limit income.

Generally speaking the SBA requires tax returns and financing decisions to be based off of tax returns. However, so long as lenders can get adequate information to tie the financial statements back to the tax returns, they can use the financial statements instead of the tax returns. As described above, you can accomplish this by utilizing a QofE or by having the accountant provide financial statements and support that ties the financial statements out to the tax return and shows the difference.

Where it can get a bit tricky is if the seller is using the business as their personal checkbook and running everything through it. Often times lenders will not accept certain personal add backs (travel, meals, entertainment, gasoline, and personal expenses buried in other categories like office, repairs, etc.) because it is almost impossible for the lender to verify these are not legitimate business expenses. Even when the QofE adds these items back, often times the lender still will not use them as the SBA does not identify them as legitimate unless the Bank can fully support them.

I hope this helps. If you need to discuss further, need help analyzing the numbers you have, or need assistance finding the fight lender, we would love to assist you. You can reach me here or directly at redacted Good luck with your search.
commentor profile
Reply by an intermediary
from City University of New York (CUNY) System in Tinton Falls, NJ, USA
If you are definitely going to use the SBA, then the add-backs will be allowed but limited to what they can underwrite. As to unreported income or timing issues of income, these will not be considered for the SBA. Actual income in those cases would have to be determined through a QofE, which likely means a larger transaction that wouldn't necessarily facilitate an SBA financing. Tell the Seller NOT to hide the income, as the payback (for last year's pre-tax filing) will dramatically help his underwriting case and get him a value far in excess of the tax they will have to pay.
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