Credit granting by financial institutions is a risk-based endeavor.


The hoops your business must jump through to satisfy your financial institution will vary based on the size of the requested loan and the perceived risk.

Perceived risk is reflected in the interest rates charged and the collateral required. The level of perceived risk may also be gauged by the guarantees from others, beyond the company actually borrowing the funds, and the monitoring methods of the financial institution during the loan period, such as interim financial statements and other loan covenant requirements.

At one extreme, the financial institution will not lend the money if it perceives the risk of default to be too great. On the other extreme, the financial institution may lend the funds based merely on a signature of a responsible party.

The vast majority of borrowing falls between these two extremes.

Just as your business is set up to earn a profit, so is your financial institution. Loan interest is its chief source of revenue.

Your lender’s profitability is the spread between the interest it earns on your loan and the cost of servicing that loan. The cost includes opportunity costs associated with what the lender could be earning on that money if it had not lent the money to your organization, administrative costs associated with monitoring the loan and possible collection costs if you have difficulty repaying the loan.

By requiring an audit, your financial institution receives an opinion on the fairness of your financial statements by an independent third party. The auditor’s opinion gives significant credibility to the year-ended audited figures for those who rely on them for credit decisions or other uses.

An audit does not make the credit decision for your financial institution. It merely presents an independent verification of your financial information in an accepted and consistent format.

It also facilitates further analysis, which then leads the financial institution to its credit decision. An audit is a vital tool for larger or riskier loans.

One of the key uses of a set of audited financial statements for the financial institution is the internal analysis of a company’s financial condition. The analysis includes changes from previous periods, consistency with or deviations from the company’s business plan, and comparability with other organizations in its industry.

The audited financial statements, with the footnote disclosures, allow the analyst to make an “apples to apples” comparison with other organizations’ statements. Such a starting point provides a trusted set of numbers that do not require further verification. Another inherent feature of the audit relied upon by financial institutions is collateral monitoring.

It is one thing to see a warehouse full of inventory, which the loan officer may view from time to time. But what good is that inventory for collateral purposes if the customer does not actually own it – or if it is obsolete, damaged or expired?

Take accounts receivable as another example. Typically, accounts receivable represent a large part of a company’s assets. But how does the lender know those promises to pay will result in payments?

The audit gives assurance to the lender regarding these and other key concerns about a customer’s collateral and ability to repay the loan.

The bottom line for most businesses seems to come back to clear communication and trust.

Lenders are looking to get behind the numbers to find the story behind the company’s financial statements – what is driving margins, trends and changes in financial position so that they can better understand the company’s needs.

Lenders are among the key users of audit information. Your loan officer wants to work with you to help you succeed, and the audit is a valuable tool in building that relationship.