Commercial Lending - Documentation Required

If you’ve ever purchased a home, you know the paperwork requirement is deep! The commercial lending process isn’t any different. It started with me reaching out to my banks letting them know I was interested in buying property.

Side note on banks: Don’t have all your money in one place. Have a relationship with a national bank and a local bank.

Both banks sent a list of the required documentation. While each of their lists were mostly identical, there were some differences. I just listed everything.

The list below is what the lenders asked for initially. After that, there is a list of documents the lender requested later on in the process once I was actively in the due diligence process. 

Initial list of Financial documents required:

• Current year Profit and Loss Statement and Balance Sheet
• Prior 2 years Profit and Loss Statement and Balance Sheet
• Past 3 years Business Tax Returns - including all schedules and worksheets
• Past 3 years Personal Tax returns - including all schedules and worksheets
• Business Debt Schedule showing existing debt on the business 
• Personal Financial Statement

If you start the process, but have not filed your current year tax return, you may have to show the Profit and Loss and Balance Sheet, and the copy of the extension application. 

Business Debt Schedule

The business debt schedule is a detailed list of all existing business debts. The business debt schedule shows: Creditor, the original amount of the debt, the monthly payment, Maturity Date, Interest rate, and collateral pledged as security for the loan. If there is no debt, the form must still be submitted stating there is no debt.

Personal Financial Statement

The personal financial statement shows your net worth (assets - liabilities = net worth). The personal financial statement is used to determine if the borrower has enough equity in their assets to cover the loan in the event of default. 

Many of you may be wondering, “If this is a business loan, why would  personal assets be a consideration”. I asked the same question - mainly, because I wanted to hear what the lender had to say. 

Since Covid, banks are looking for personal guarantees for loans. Why?

According to the Harvard Business Review, over the next two years (2024-2026) more than $1 Trillion in commercial real estate loans will be coming due (more on that in a future article). More borrowers are becoming delinquent and defaulting on loans. 

Required documents for ALL borrowers and guarantors  

• Two years business tax returns, all pages, schedules, forms and statements must be included.
• Two years personal tax returns, all pages, schedules, forms and statements must be included.
• If the most recent year’s tax returns are not yet filed, provide all W-2 and K1 documents, along with the previous two years full personal tax returns and a copy of the extension filing.
• Personal Financial Statement for all owners and non-owner guarantors
• Business Debt Schedule

Note: If you have a Real Estate Holding Company, the same information will need to be submitted. I'll cover the Real Estate holding company in another article.

Business documentation

As we got closer to closing, the bank asked for:

• Business license
• Articles of Organization/incorporation
• Operating Agreement
• 3 months bank statements - updated throughout the process
• Current Accounts Receivable Aging Report
• Current Accounts Payable Aging Report

If you've been following these articles and are thinking 'I don't know if I even want to fool with this', I get it. I remember feeling overwhelmed at times, and still having to keep up with all the other things - business, family, and life. Sometimes I wondered if this was really the road I wanted to travel.

The flip side of this: While I was looking for a space to rent, two of my colleagues in different areas of the country had to move from their long-time leased offices. Why? Their landlords almost doubled their rent. Imagine paying and budgeting for $1000 per month for rent, and at lease-renewal time, you get 'Hey! We want $2000 per month now!' Who budgets for that kind of increase?! I didn't want to be on the receiving end of that.

Get organized

Start getting organized now. I can't tell you how many calls I receive from tax clients looking for copies of their returns. As a tax payer, you should get a full copy of your tax return from your tax professional whether physically or digitally. You should save the return and all other documentation together in a safe place.

If you missed last week's article on credit, you can catch it here.

Next week's topic: loan terms. This one made my head spin.

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LuSundra Everett, EA is the Home Biz Tax Lady, owner of Everett Tax Solutions, and ETS Tax Relief. LuSundra is passionate about educating taxpayers about tax law in an easily digestible manner. LuSundra is a huge proponent of tax education and offers training to other Tax Professionals to help them stay on the cutting edge of tax law and new developments. If you need assistance with an IRS or state tax issue, contact ETS Tax Relief here.