09 Oct Upgrade Your Financial Statements to Secure Better Financing

Financial statements are much more than just an annual compliance requirement — they are a tool for securing the capital needed for your business to grow and thrive. If you’re seeking financing from banks, credit unions, or private lenders, the quality of your financial statements and the type of engagement your accountant performs can make a significant difference.

Most small businesses obtain a compilation engagement which provides very basic financial statements based on the information you provide, a review engagement offers better financial statements AND provides more credibility to the numbers in those financial statements. Better information and increased credibility can improve your chances of obtaining financing and potentially result in more favorable borrowing terms.

Compiled vs. Reviewed Financial Statements: Lenders Want Better Information

• Compiled Financial Statements: These basic financial statements do not need to fully comply with accounting standards and are sufficient for internal use and for preparing a tax return. However, their limited nature makes them difficult to use for anything else.  Further, these financial statements are prepared with taxes in mind.  When preparing financial statements this way, the objective is actually to make the company less profitable in order to pay less tax.  Accountants accomplish this by taking as many allowable write-offs, expenses and deductions as permitted by the CRA.  The downside is that the company appears less profitable, and the balance sheet appears less healthy than it otherwise would under different accounting.  Not what lenders want to see when you are seeking a loan.
• Reviewed Financial Statements: These are a complete set of financial statements that are prepared in accordance with accounting standards. The focus on these financial statements is to provide meaningful information to third parties such as lenders, investors, funders, bonding companies, etc.  As part of the process of drafting these financial statements we will look to help identify assets that can be recognised on the balance sheet to make it look healthier.  This can be done in several ways such as recognizing development costs as internally developed assets and depreciating property, plant and equipment over their useful lives as opposed to tax depreciation rates which are typically much higher.  Essentially, the financial statements will put your best foot forward and provide the detailed information that lenders are looking for.  Also, don’t worry about overpaying taxes.  We can make all of the relevant tax deductions in your tax return so that you are still minimizing your taxes.  Yes, you heard that right, you can actually have your cake and eat it too!

Compilation vs. Review Engagements: Lenders Want More Credibility

• Compilation Engagement: The work required of a CPA firm when conducting a compilation engagement is quite low, which is why they can be done for much less cost than a review engagement. However, lenders know this and thus will often limit how much they will lend to a client based on a compilation engagement.  They may also ask for more security in the form of assets pledged as collateral and personal guarantees from shareholders which can limit the company’s, and sometimes the shareholders’, ability to borrow more in the future.
• Review Engagement: Professional standards require much more work to be performed to verify the accuracy of the financial statements under a review engagement. Because of this increased level of scrutiny, lenders will often lend more to companies that get a review and may be more amenable to negotiate on the terms and conditions of the loan.  As a side benefit, you will also be early preparing for a potential sale of your company at the same time.  Most investors want reviewed financial statements before they will purchase a private company.  So if a venture capital company or a larger competitor knocks on your door with an offer for your business you will be ready to negotiate on better terms with a completed review engagement in your pocket.

The Financing Advantage of a Review Engagement

Lenders want confidence that the financial information they’re relying on is reliable. A review engagement provides:

1. Enhanced Credibility – Reviewed financial statements signal that your business takes financial reporting seriously, making you a more trustworthy borrower.
2. Improved Negotiating Power – Lenders may extend larger credit limits, offer better interest rates, or provide more flexible repayment terms when they have confidence in your financials.
3. Faster Loan Processing – Stronger financial statements can streamline the due diligence process, helping you access capital more quickly.

In short, a review engagement can position your business as lower risk in the eyes of lenders.

Strengthening the Balance Sheet: Fair Market Value Remeasurement

Another often-overlooked advantage of a review engagement is the opportunity to remeasure property, plant, and equipment (PP&E) at their fair market values when you adopt the full accounting standards.

Under a compilation, financial statements typically report assets at historical cost less depreciation using tax depreciation rates, otherwise known as Capital Cost Allowance (CCA). The thing with CCA rates is that they tend to be high, meaning they let you write off your equipment faster.  While this is good for taxes it is bad for financial statements because this decreases your profitability and make your balance sheet less attractive to lenders.

When you switch to a review engagement, we have the opportunity under accounting standard to write your assets up to their fair market value which can make your balance sheet sing to lenders.  Further, we can then set depreciation rates that actually reflect the use of the assets over time which tends to increase your profitability and keep your balance sheet looking healthy.  The best pare is that we can do all of this AND make the appropriate tax write offs in your tax return to minimize your taxes so you get the benefits of better financial statements without costing you more in taxes.

Why This Matters:

• Improved Net Worth – By revaluing assets upward, the equity section of your balance sheet strengthens, showing a healthier financial position.
• Better Debt-to-Equity Ratios – Stronger equity improves key ratios that lenders use to assess financial stability and borrowing capacity.
• Increased Borrowing Power – A balance sheet that reflects fair market values can directly influence the amount of financing available, especially for businesses with significant fixed assets.

A Strategic Investment in Your Business

Upgrading to a review engagement is an investment in your business’s financial health, future growth, and eventually will help you sell for top dollar if and when that day comes. Not only does it give lenders confidence in your numbers, but it also allows you to put your best foot forward by showing the true value of your assets.

If you’re planning to expand, purchase new equipment, secure working capital, or are looking to sell and retire then consider talking to us about whether a review engagement is the right step. The relatively modest additional cost is often outweighed many times over by the financing opportunities it opens.