We are seeing a shift with the banks now where they are providing loans for sustainable business purposes at lower rates, this is a great way to encourage people to move their businesses towards more sustainable options. However normal lending requirements are still in place, while these loans may be a fantastic offering there are still a few things to consider before taking a loan or hire purchasing vehicles or equipment.
- Can I afford the payments?
- What is the interest rate? Interest is the amount you are charged over and above what you borrow, so you want an interest rate as low as possible.
- What contingency plans do I have in place if the worst happens, and I no longer have the ability to make the payments?
- Is this purchase a necessity or a want?
You may be asked for:
- Last year’s financial statements: this is a more traditional request and relates to the last set of financial statements your accountant prepared at your end of year, this can be quite outdated information and not give a full picture if you are half way through a new financial year.
- Cash flow Forecast: this is a projection of your income and expenses over a period of time often 1, 3 or 5 years, this can be shown with and without the loan payments giving a full picture of how it will affect your business.
- Access to your bank statements or accounting software: this one is relatively new and not widely used yet, but it is a very quick way of sending information if you are looking for financing. Bear in mind this is giving them full access to your accounts so be very sure that you want to provide this information. It is extremely important that you keep only business transactions in the business accounts and personal is kept out of these.
- Monthly accounts or year to date financial statements: this information is very similar to end of year financial statements; it will include a Profit and Loss report (which shows how much profit you are making) and a Statement of Financial Position (assets and liabilities of the trading entity).
- Business Plan: if you are starting out in business or borrowing for significant growth you may be asked for a business plan, this is a document that provides a detailed description of your plan for the business. It includes items like key team members, market analysis, goals, marketing plan, finance required.
How to prepare:
- Give yourself plenty of time
- Discuss your plans with your accountant or bookkeeper if you are using one, this will give them a chance to prepare financials that will be requested.
Important points to note:
- Mostly when banks or lending institutions request this information from you, they require it to have been prepared by your accountant. Don’t take this personally, they just like to ensure that the information they are reviewing is unbiased.
- If you are buying an asset or a vehicle the ownership and loan documents must be in the name of the entity you trade through. For example if you run your business as a company, the company must be the legal owner of any purchased assets and if funding is required this must be in the name of the company.
- There are brokers out there who will work with you to get you the best funding for what you are trying to achieve, most of the time this is the best plan of action. They are the experts in their field and can get you the best results.
How does this affect your financial statements?
This will be a general example; any specific accounting questions should be directed to your accountant.
When you purchase an asset, this is classified as a fixed asset and the balance of this is shown on your Statement of Financial Position. The Statement of Financial Position shows a snapshot of your business assets and liabilities. Assets are included on the Statement of Financial Position; however, it is recognised that these will decrease in value over time. So, what happens is we claim a portion of the value of the asset as an expense called depreciation (at a rate specified by the Inland Revenue) and this decreases the value of the asset over time.
Depreciation shows as an expense on the Statement of Financial Performance, which shows income less expenses resulting in either a profit or a loss.
When take out a loan for the business and the loan does need to be for business purposes to either buy an asset or expand, if it is a personal loan to expand your home then it isn’t included. The loan shows as a Liability on the Statement of Financial Position. As you make payments on the loan the interest portion can be claimed as a business expense and included in the Statement of Financial Performance and the principal payments decrease the liability on the Balance Sheet.
In summary the purchase of an asset or the taking out of a loan will not affect the amount of tax you have to pay as it is shown on the Statement of Financial Position.
But the depreciating of a purchased asset and the interest payments of a loan will decrease your profit meaning less tax to pay.
