Why is it more difficult to get a loan if you’re self-employed?

©2021 Adam Meredith

For someone who’s self-employed they will need to provide financials on their company, including tax returns and business financials. The challenge is in the review of these statements versus simply looking at a W-2 and pay stub to verify income.

Nobody really likes paying any more in taxes than is legally required, and tax returns by its nature is limited in the amount of information it provides. That means tax returns submitted to lenders by business owners tend to show limited information on how their companies are actually doing. And typically, what’s presented is a situation that seems worse than reality.

Still, tax returns are required. Banks must answer to regulators so banks need to make sure the potential buyer is using a high level of scrutiny and providing valid information. And what’s more valid than a tax return?

If you’re willing to provide a tax return to the federal government and attest that this is what you’re making, then that’s what you’re making. We’ve been asked, why can’t I just submit a financial statement and call it a day?

Not all accountant-generated documents are the same. A compiled statement bears little weight at all. That’s because a compiled statement simply shows the accounting firm has input the management given numbers in a format easily understood by most people. The accounting firm is not attesting to having reviewed the submitted information. It’s just “compiled.” There is zero accountant oversight and scrutiny.

A reviewed statement bears more weight. The accounting firm is attesting it has made some effort to review and verify the numbers. A reviewed statement can give a lender a higher level of confidence that what the numbers indicate should align with the reality of the state of the business.

The highest level is an audited statement, where there’s no question. A CPA firm is attesting, “This is exactly what it is.” 

Additionally, lenders will compare your business against industry benchmarks using North American Industry Classification System (NAICS) codes. For example, they’ll look at how your business measures up against the industry standard on certain specifics to determine the overall health of the business.

The bottom line is for self-employed people, lenders are really analyzing both the business and the individual, not just the individual.

Great advice. Great rates. From helpful and responsive reps you can trust. Three good reasons to turn to AOPA Aviation Finance when you are buying or refinancing an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (800.627.5263), or click here to request a quote.

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