P & L STATEMENT
RATE & TERM REFINANCE
Essential Elements

When using a business Profit & Loss (P&L) statement to qualify for a rate-and-term refinance, lenders will closely examine key elements to assess the borrower’s financial health and stability.

Consistency of Income
Lenders look for consistent or increasing income levels over the past 2–3 years. They prefer stable or growing revenue rather than fluctuating or seasonal income.

– A YTD P&L statement shows performance for the current year and should be up-to-date. If it’s late in the year, a YTD P&L statement will likely be requested. 

Revenue and Gross Income
Lenders evaluate if the revenue is sufficient to cover expenses, especially debt obligations and they will consider how revenue is trending compared to prior years.

– Gross income or gross profit (revenue minus cost of goods sold) indicates the business’s ability to generate profit before operating expenses.

Operating Expenses
Lenders review operating expenses as a percentage of revenue. High expenses relative to revenue may indicate inefficiency or financial instability.

– Consistent expense levels over time are preferable. Large fluctuations can raise questions about the business’s operational management and cost control.

Net Profit
Net profit should ideally show a positive trend, or at least consistency. If the business has any significant net losses, the lender will need a clear explanation.

– Consistent or growing net income makes the lender more assured, as it implies the business can handle debt payments.

Add-Backs and Adjustments
Certain expenses that are one-time or non-recurring (like lawsuit settlements, unusual repairs, or startup costs) can often be “added back” to increase qualifying income.

– Some personal expenses or discretionary spending may also be added back, depending on the lender’s policies.

Balance Sheet and Cash Flow Analysis
Lenders will request a balance sheet to see the cash reserves and assets available to the business.

– Guidelines may require a cash flow statement along with a P&L to verify that cash inflows align with income reported on the P&L. Cash flow stability is critical, as it shows that the business can meet monthly obligations.

Documentation Consistency and Accuracy
Lenders may cross-reference the P&L with the balance sheet, bank statements, and other relative documents. Consistency across all financial documents is essential.

By analyzing these key components of a business’s P&L statement, lenders can make informed decisions about the risk associated with providing a rate-and-term refinance. This assessment not only helps them evaluate the current financial situation but also provides insight into the business’ future profitability and stability. Further, by presenting a strong, well-documented P&L statement, borrowers can significantly enhance their chances of qualifying for favorable refinancing terms.