P & L Statement
Rate and Term Refinance

Using a business Profit and Loss (P&L) statement as proof of income is a common method for business owners or self-employed individuals to qualify for a Rate and Term Refinance on a loan. A Rate and Term Refinance modifies the terms of an existing loan—such as lowering the interest rate or extending the repayment period—without adding to the loan principal or taking cash out. For self-employed borrowers, a P&L statement can provide essential evidence of consistent income, helping to secure better loan terms.

Why a P&L Statement Is Used as Proof of Income
For business owners, traditional proof of income, such as W-2s and pay stubs, may not be available or reflective of their actual earnings. In these cases, a P&L statement serves as a substitute by summarizing the business’s total revenue, costs, and net income over a specific period, often a year or quarter. This financial summary offers insight into the business’s revenue generation and expense management, which helps lenders assess:
– A consistent revenue stream indicates reliable income, lowering the lender’s risk.

-Net profit after expenses reflects the business’s ability to generate income, making it a crucial factor in loan approval.

– Lenders look for sufficient cash flow from operations to cover debt obligations, especially if the refinance reduces monthly payments.

Elements of the P&L Statement Lenders Consider
– Lenders want businesses with steady or increasing revenues, as this indicates a reliable income source to cover loan payments.

– This metric helps lenders understand the direct costs of production, highlighting profit margins and operational efficiency.

– Net profit or loss shows whether the business is profitable after all expenses, directly impacting loan eligibility.

– Lenders may assess income stability by comparing quarterly or annual P&L statements to identify seasonal patterns or volatility.

Using a P&L statement as proof of income offers distinct advantages
– Unlike personal tax returns, a P&L focuses on the business’s income and expenses, more accurately reflecting profitability.

– Provides  a clear financial picture, especially with multiple periods of profitability, can increase the likelihood of approval for a lower interest rate or extended loan term.

– Demonstrating strong, consistent earnings and good expense management can help secure more favorable refinancing terms, reducing overall borrowing costs.

Additional Considerations
– Some lenders may require additional documents, such as bank statements, tax returns, or a balance sheet, to corroborate the P&L and confirm the borrower’s financial position.

– Different lenders have specific guidelines on how they assess P&L statements, so it’s beneficial to understand each lender’s requirements and ensure the statement aligns with those standards.

A well-prepared P&L statement can help establish the business’s income stability and financial strength, supporting an effective case for rate and term refinancing that may lower the cost of debt or improve cash flow.