What Lenders Review on Your Business Tax Return?

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WHAT LENDERS REVIEW ON YOUR BUSINESS TAX RETURN?
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While making a small business loan application,
lenders typically require a lot of necessary
paperwork before approving you for a loan. Among
that essential paperwork, the information in your
annual tax return is consider important to
lenders. The lenders have a reasonable
justification for requesting this information
because the same can helps them protect from
encountering bad loans, and that, in turn, helps
you with lower rates and fees on the loan.
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Here are three main reasons why lenders will ask
you for a tax return
To Validate Your Income
To Track Any Losses
To Review Debt-To-Income Ratio
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To Validate Your Income
What information lenders review on your tax
return is typically based on the type of loan
youre applying for. However, much information
can be taken directly from your return or
conclude from the mountain of paperwork you
provide with your loan application. A tax return
is the most significant document that lenders
want to see in order to determine your
creditworthiness as a healthy borrower. The main
reason why lenders need a tax return is to
validate your annual business revenue. They want
to see your submitted revenue is steady or rising
annually, being it evidence that you can easily
repay the business loan. Certainly, lenders want
to lend to those borrowers that have the
capability to make timely loan repayments.
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To Track Any Losses
Similar to revenues, business losses are also
mentioned on your tax return. If there are losses
mentioned on your return, they are considered red
flags to lenders implying you dont have enough
income to qualify for the loan youve applied
for. Even if youre able to get approval on your
business loan application, the chances are your
loan amount will be less than you need with
higher interest rates. Keep in mind that tax
deductions can intensely affect reported income.
You can use the help of accountants to prepare
your documents in order to get you more savings
on taxes, and that usually means reducing your
income. When you need a loan, you might have to
neglect certain tax deductions to demonstrate
enough income for loan qualification.
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To Review Debt-To-Income Ratio
Lenders have different criteria while reviewing
your loan application. Short-term lenders use tax
returns to validate borrowers annual revenue.
Whereas long-term lenders use tax returns to
validate your cash flow is greater than your
monthly payment. They need this to calculate your
debt-to-income ratio before approving you for a
business loan. Lenders need a debt-service
coverage ratio of 1.5 or greater, while some
might work with a lower ratio, but a ratio of
less than 1.0 will not get approval. In order to
secure the best loan terms, a ratio of 2.0 or
higher is considered ideal.
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THE BOTTOMLINE
When applying for a business loan, staying
organized and providing all the necessary
paperwork is key to a successful loan
application. The quicker you provide all the
necessary documents, the sooner you can get
pre-approval on your business loan. A business
tax return is a fundamental element in the loan
qualification process. If you have any questions
regarding your tax return submission, the experts
at Merchant Advisors can assist you and find the
right loan option based on your unique business
needs. Give us a call today or fill out a loan
application form to get started today!