I Can't Get a Loan Because My Profit is Too Small! Now What?
By Tom Copeland, posted with permission.
It's extremely difficult to get a bank loan in these tough financial times. It's even harder for family child care providers.
Why? Because when banks are determining if a child care provider can afford
to pay back a loan, they will look at the child care provider's profit. This is shown on the bottom line of IRS Form Schedule C Profit or Loss From Business.
Since many child care providers do not make a large profit, they are often turned down for a loan.
Is
their anything a child care provider can do to improve her chances of
getting a loan to buy, improve, or refinance their home? Yes.
Your
Schedule C profit is not an accurate depiction of your ability to pay
back a loan. This is because there are a number of expenses on this form
that do not represent payments you made that year.
The
first type is depreciation. When you buy an item that you depreciate
(furniture, appliances, computers, home improvements, etc.), you spread
the cost as a business deduction each year over a number of years. The
amount of
depreciation expenses that are shown on your Schedule C do not
represent any actual expense to you for that year.
Therefore,
they should not be counted as an expense when applying for a loan.
These depreciation expenses appear on Schedule C, line 13. When applying
for a loan, the amount on this line should be subtracted from your
expenses, which will then increase your profit.
The second type of expenses are your house expenses that appear on Form 8829 Expenses for Business Use of Your Home.
Perhaps the biggest expense on Form 8829 is house depreciation (line
41). These expenses exist even when you are not in business. Therefore,
they shouldn't be included on Schedule C when applying for a loan
because they aren't paid out of your business income.
In addition to depreciation, you should remove the business
portion of your
house expenses from Schedule C, line 30.
After removing depreciation and house expenses from Schedule C, your profit will be larger and this may make a difference in qualifying for a loan.
Cash Flow Statement
If your bank officer won't consider your revised Schedule C, your next step is to prepare a monthly cash flow statement. This statement shows the sources of your monthly income and a listing of your monthly expenses. This statement would not include depreciation or non-business expenses (such as your house expenses).
You can download a free cash flow template taken from my book Family Child Care Business Planning Guide. Click on the tab "Web Components."
Bank officers are more likely to accept a cash flow statement, although you may still need to explain why this is a better reflection of your ability to pay back a loan than your Schedule C.
Don't give up if one bank turns you down. Go to the next one. A credit union or neighborhood bank may be more receptive to your loan application than a big bank.
What did you do that made a difference when you applied for a loan?
Image credit: loanpac.com
For more information, see my book Family Child Care Business Planning Guide.
Copyright 2011, Tom Copeland, www.tomcopelandblog.com
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