When you apply for a small business loan, an income statement from the last three years is usually one document you need to produce. Here are the details you need to know to calculate this financial document for a lender.
What is an Income Statement?
Investopedia gives an easy-to-understand outline here:
An income statement is a financial statement that reports a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period.
Unlike the balance sheet, which covers one moment in time, the income statement provides performance information about a specific time period.
An income statement is also called a Profit and Loss Statement.
Income Statement Breakdown
- Revenue: The top line of an income statement is money coming in – sales revenue without any deduction. The bigger the number, the more expenses you can take on. A smaller number means expenses will have to be lower to stay profitable.
- Direct Costs: Direct Costs are also known as Cost of Goods Sold, or COGS. This number reflects how much it costs to make the product or provide a service. For example, a skateboard company would put down the costs of the parts and labor to assemble. Not included are items like office space costs. The number won’t be the cost of goods that are not sold, only those purchased by a consumer.
- Gross Margin: This percentage represents present of total sales revenue the company retains after incurring direct costs associated with producing goods and services sold. The higher the percentage, the more the company retains on each dollar of sales. Lenders want to know that the business can pay other costs and meet debt obligations.
- Operating Expenses: List all of your expenses as line items, excluding costs of goods sold. Include everything else your company pays for to keep up and running like rent, payroll, utilities, marketing.
- Operating Income: Earnings before interest, taxes, depreciation, and amortization. According to Investopedia, operating income is considered the most reliable number reflecting a company’s profitability.
- Interest: If you have a loan, include interest payments. Skip this line item if it doesn’t apply.
- Depreciation and Amortization: Tangible and intangible expenses associated with your assets like a car. An intangible asset might be a patent.
- Taxes: This line reflects income tax paid or that you expect to pay.
- Net Profit: Also called net income or net earnings, net profit is the true “bottom line”. A negative number indicates that your operating at a loss. You might have too many expenses or not enough income.
Income Statement Help
Creative and proactive, business owners wear multiple hats. Sometimes finances are not in their wheelhouse. Luckily, there are plenty of resources available to help you craft an income statement for a lender. Reach out to you accountant, bookkeeper or another financial professional who can run the numbers for you. Additionally, the SBA’s Small Business Development Centers can provide assistance. Find your local center here.
If you’re seeking a small business loan, have these documents on hand.
- Personal & Business Tax Returns
- Personal Financial Statements, required from each individual owning 20% or more of the company
- Profit and Loss Statement
- Balance Sheet
An income statement doesn’t tell the whole story of your business. If you’re applying for a loan, there are other items and financial ratios considered.
Consider applying for an SBA loan, the “gold standard” in small business loans. These low- loans have low-rates, long terms and very low payments. SBA loan proceeds can be used for working capital, hiring, marketing, to pay off high interest debt, commercial real estate purchases and more
Check the status of your company before you apply with SmartBiz Advisor*, our new no-cost online educational tool.
This tool helps you learn how banks typically evaluate your business and recommends ways to increase your likelihood of approval when applying for the low-cost SBA and bank funding you deserve.
Just like a CFO in a large business, SmartBiz Advisor can educate you on how to best build your lending profile. Banks that provide SBA loans look at a number of different factors like debt coverage, debt usage and personal credit scores. SmartBiz Advisor is a free and transparent tool. Learn more about SmartBiz Advisor here.
*What you need to know: The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes only. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.