Real estate investors are continually seeking ways to maximize returns on investments, improve net income and increase cash flow. Interest rates on business loans can significantly impact all three of these goals. This is especially true in 2018 and future years, when the deductibility of interest expense may be limited due to the new tax law and as interest rates continue to increase.
Thankfully, there may be a tool available to help minimize interest expense if your financial statements are compiled, reviewed or audited by a CPA. Such statements can do more than assure that your business’s books are in order; they can potentially assist in obtaining a lower interest rate and better terms from lenders.
According to a 2011 study done at the University of Chicago’s Booth School of Business, companies with audited financial statements received loan interest rates that were nearly 0.75% lower than companies without such audits. This difference meant an average savings of thousands of dollars for the businesses in the study.
By providing documentation that your financial procedures and bookkeeping are sound, you instill confidence in banks and make them more likely to grant you a loan with better terms. This can improve cash flow and reduce your expenses. Bank requirements and preferences vary, but there are generally three levels of assurance on the financial statements prepared by the CPA that they will consider.
An audit provides a thorough examination of the completeness and accuracy of a business’s financial statements. The CPA firm will provide an audit opinion on whether the financial statements are presented fairly, in all material aspects, in accordance with the applicable financial reporting framework. It is intended to provide creditors with a high level of comfort on the accuracy of the financial statements. While a full audit is the highest level of assurance you can get, it’s also the most expensive and not essential for some businesses and real estate investors.
A review is a less expensive option than an audit that still provides a basic level of assurance on the accuracy of the financial statements. Although no opinion is given by the CPA firm, you receive a review report and a full set of financial statements and note disclosures.
Still another assurance solution, the CPA may issue a compilation report that is intended for use by lenders who may appreciate the business’s association with a CPA without requiring a level of assurance on the accuracy of the financial statements. This report provides a simple statement that your financials are appropriately prepared according to generally accepted accounting principles (GAAP) with no assurance.
Regardless of the option you choose, your investment in these services may pay off, in the form of higher return on investments, increased net income and less cash outlay. A recent James Moore client was able to increase his borrowing capacity and reduce his interest rate simply because the bank knew that a review of his financial statements would be performed. The result: a savings of over $300,000 in interest costs for 2018 and future years, which will also allow him to grow his business by over 50%.
Before undergoing any kind of assurance services, it’s important to make sure the cost doesn’t outweigh the benefit. With any of the options we’ve described, you may have a powerful tool that gives you a better chance at loan approval, better terms and lower interest rates. Consulting with a CPA and your banker can help you determine exactly what the lender is looking for and whether an audit, review or compilation will help your cause.
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