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Profit-and-loss statements offer lenders snapshot of financial performance

by  | Corporate
Posted:     Updated: Oct 20, 2015  14:52 ET
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If you're a business owner seeking a commercial mortgage, you'll find that the documentation required to apply for a loan varies a bit, depending on the lender. A bank might want personal or spousal financial information, in addition to your business records, and nonbank lenders might be a little less stringent in their documentation requirements. But no matter where you look for a commercial mortgage, lenders will want to see your company's profit-and-loss (P&L) statement.

A P&L statement measures your company's financial performance over a specified period of time. It gives lenders a snapshot of financial performance and is required by the Internal Revenue Service (the only financial statement the IRS demands of every business). It's invaluable to business owners, too, in financial planning and identifying problems that need to be fixed before seeking a loan.

They can get a little complicated but, simply put, P&L statements (also called income statements) measure sales minus expenses to arrive at a company's net income. The statements go into some detail on the different categories of sales and expenses, which vary from business to business.

To illustrate, let's say you're looking to refinance a loan on an apartment building. Most of the income from the building comes from rent. The expenses include fixed annual costs, as well as taxes, debt service, and the cost of operating and maintaining the building.

Let's also say that the building has 20 units, they rent for an average of $1,000 a month and the overall building had a stellar occupancy rate of 100 percent over the past year. You have a soda machine in the lobby and a coin-operated laundry onsite. The chart below shows a P&L statement for an apartment company, breaking down income, plus some typical expenses.

123 Main Street Apartments
P&L statement, Fiscal 2015

Rents $240,000
Laundry $11,000
Vending $1,000
TOTAL $252,000

Management fees $39,000
Trash removal $4,000
Accounting & Legal $2,000
Insurance $6,000
Utilities $11,000
TOTAL $62,00

(Annual income minus operating expenses)

Property taxes $12,000
Current loan [interest only] $18,000
TOTAL $30,000

NET INCOME: $160,000
(Operating income minus taxes and debt service)

Those few entries (and there could be many more, especially expenses and one-time improvements) give a prospective lender a clear idea of how much the business owner could afford to spend on a new mortgage, be it interest-only or one that begins paying down the loan's principle. It also gives the business owner some items to consider. Well over half of the company’s operating expenses are payments to a property management company. Maybe there’s a cheaper way to maintain the place and generate more money to finance a new mortgage.

That's a P&L calculation for one common type of commercial-property business. For other types, the broad categories are the same, and the specific expenses different.

Restaurateurs seeking a loan to buy the building their restaurant occupies would individually break down the costs and expenses of food, wine, beer, liquor and catering services, and have higher labor costs than an apartment-company owner. An industrial company's statement would typically have specialized sales categories and show the amount spent buying and maintaining equipment.

No matter what the market, the P&L statement is designed to aid the potential lender and give you information to communicate knowledgably about your business. To that end, it pays to understand the statement and what it describes. Notice, for instance, that net income is different than operating income (they both appear on the P&L). Also, they both differ from cash flow, which takes into account when income is actually booked (a completed transaction), as opposed to an account receivable — or an IOU.


Bill Lewis is editor of Scotsman Guide Commercial Edition. Reach him at (800) 297-6061 or

Topics: Commercial lending | Commercial underwriting
More by: Scotsman Guide Media


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Profit-and-loss statements offer lenders snapshot of financial performance

by Scotsman Guide Media | Corporate
Posted: Sep 30, 2015  18:33 ET    Updated: Oct 20, 2015  14:52 ET

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