Why Is My Lender Asking for So Many Documents?

When going through the loan application process, most clients ask, “Why Is My Lender Asking for So Many Documents?” or “Why do they need that document/information?” Whether this is your first loan application or your tenth, the list of required documents can feel overwhelming and, at times, frustrating—but understanding the purpose behind each can make the process much more manageable.

These Are The Most Commonly Requested Documents:

Business Financial statements: 

• 2-3 years of business tax returns 
• Year End or Year-to-date Profit & Loss and Balance sheet 
• Debt schedule  

Personal Financials: 

• 2-3 years of personal tax returns 
• Personal Financial Statement (PFS) 
• Credit report 

Breaking Down the Essentials

Financial statements include two documents:

1. Profit & Loss

2. Balance Sheet

There are multiple degrees of presentation for these statements. The most basic is a company-prepared (or Co Prep) Profit and loss and Balance Sheet. Then there are business tax returns and, finally, audited financial statements.

Audited financial statements are considered the most accurate presentation of a business’ financials but lenders are also aware that they are expensive, time-consuming and not necessary for all businesses. Therefore they are generally reserved for large loans or complex business structures.  

Why Tax Returns Pull Double Duty

Business tax returns are the most frequently requested form of financials. Here’s why:

• Every business is required to file them, usually using forms like the IRS Form 1120 or 1065, depending on its structure

• Business owners often overstate expenses and understate income for tax purposes, so tax returns are considered a conservative view of a business’s financial position.

• They also provide context, such as the business's formation date, industry, ownership structure, and ownership percentage.  

Depending on the time of year, a lender may ask for a Year-End or Year-to-Date Profit & Loss and Balance Sheet:

• • Applying before your most recent tax return is filed? The lender will likely ask for a Year-End package so they can see how the business performed during the previous calendar year.

  • Applying partway through the year (generally four months or more in)? The lender will likely ask for a Year-to-Date package to understand how the business is doing currently.

  • Is your business seasonal? The lender may also request a Year-to-Date package from the same period last year to compare performance across similar months.

Every lender does things a little differently, but this is what you can generally expect.  

What’s a Debt Schedule—and Why It Matters

A Debt Schedule is a form your lender provides you that breaks down all the necessary details about any loans the business already has.

Common fields on the form are: 

• Lender or Creditor: Who the loan is with
• Original Loan Amount: What was the size of the loan when first approved
• Origination Date: When the loan was received
• Current Balance: The principal balance currently
• Term: How many years or months you will make payments
• Interest Rate: What is the interest rate of the loan 
• Collateral: What is securing the loan (it may be what the loan purchased)
• Payment: What are you paying on the loan 
• Payment Frequency: How often payments are made (weekly, monthly, quarterly, or annually)

How Personal Financials Come Into Play

Personal financial statements, which include personal tax returns and the personal financial statement (PFS) (the equivalent of the business balance sheet), look different from business financial statements and tell a different story.

The personal tax return still shows how much money you earned (w-2 wages, interest earned, IRA, pensions, annuities, social security, owner distributions). But instead of detailing your spending or expenses, they show how much your taxes are (i.e., what you owe the government for your income). It also provides information on real estate and business ownership, as well as how many dependents you have.

The Personal Financial Statement, provided by your lender, asks what assets you own (cash, stocks, bonds, retirement accounts, vehicles, real estate, etc.). It also asks for your liabilities—this includes credit cards, auto loans, student debt, life insurance loans, unpaid taxes, mortgages, and more.

Your Credit Report: A Financial Report Card

Your credit report is pulled from one to all three of the credit bureaus when you apply for a loan. Generally, the loan application includes verbiage authorizing your lender to pull it.

Your credit report shows:

• How many loans you personally have (credit cards, auto loans, recreational vehicle loans, student debt, mortgages, etc.) You can see what appears on a credit report by visiting one of the major bureaus like Equifax, Experian, or TransUnion.
• The original balance on each account
• Each account’s current balance
• Repayment history
• Current payment amounts

What Is My Lender Looking For in All This?

The business financial statements and debt schedule help lenders see how the business is performing and can answer questions like:  

• “Is the business growing?” - Growth is indicated by increasing gross revenue.
• “Is the business becoming more efficient?” Efficiency can be shown in a few ways:

1. 1. Stable gross revenue with decreased expenses
   2. Increasing gross revenue with stable expenses
   3. Expenses that grow at a slower rate than gross revenue

• “Is the revenue sufficient to cover expenses and debt payments?” This is calculated with a ratio called the Debt Service Coverage Ratio (DSCR). DSCR is calculated by taking your net income and adding back interest expense, taxes, amortization, and depreciation—this is called EBITDA. EBITDA is then divided by the annual debt service, which includes all loan payments made in a year.

  • A DSCR of 1 means the business is generating enough to pay its expenses and debts once.

  • A DSCR of 1.10 means it can pay those expenses and debts once, plus 10% again.

• “Is there another financial product that the client could benefit from?” If the financials show large amounts of Accounts Receivable and/or Accounts Payable, a lender might recommend a line of credit to support the business while waiting on client payments. If the financials show aging assets, it might be time to consider an equipment loan to replace outdated tools and avoid inefficiencies in business flow. 

• “Is the owner pulling too much cash out of the business?” If the K-1 shows that the owner(s) are taking out more cash than the business has in net income, lenders will want to understand why.

Personal Financials Tell a Story, Too

Your personal financials and credit report help lenders understand how you handle your personal finances and answer questions like: 

• “Does this individual have outside income to assist with repaying this loan if the business no longer exists?”  Tax returns show different sources of income, giving the lender an idea of how diversified someone’s income is. 

• “How does this person handle debt?” If the credit report shows frequent missed payments or charged-off loans, the lender will want to understand what led to that.  

• “Does this individual live within their financial means?” When the personal tax return and credit report are reviewed together, they can paint a clear picture of how someone earns, spends, and manages debt.

There’s a Rhyme to the Reason

There are more documents than just these six that lenders may request—these are simply the most common. Each one provides valuable insight and serves as a piece of the puzzle lenders are working to complete when reviewing a loan application. So, if your lender is asking for a document, know there’s a reason behind it. And if you're unsure why, don’t hesitate to ask. We’re always happy to help our clients understand financial statements, the lending process, and the broader financial landscape.

Additional Resources

For further guidance on preparing your loan application and understanding financial statements, consider the following resources:

• How to Fill Out a Personal Financial Statement: This workshop provides detailed instructions on completing your PFS accurately.

• 5 Tips to Become an Expert in Your Business Finances: Enhance your financial literacy with these practical tips.

• Capital Readiness Program: Access tailored advice and business loan training to prepare for funding opportunities. ​