8a Certification – Your firm’s financial statements?
What is required to be submitted?
All firms applying for 8a Certification must submit the following:
a. A copy of the firm’s current year to date balance sheet and income statement. The date of these statements cannot be any older than 90 days old when submitted to the SBA. We suggest that you provide the latest date as possible.
b. If the firm’s financials are prepared on an accrual basis and the current year to date balance sheet exhibits accounts payable or accounts receivable you must provide corresponding aging statements. If the firm’s financials are prepared on a cash basis, an accounts payable or accounts receivable aging statement is not required to be provided.
c. A copy of the firm’s last three completed year end balance sheets and income statements or as many as they have been in business, if less than 3 years.
What basis (Cash or Accrual) should the firm’s financial statements be submitted on?
I suggest that you submit the balance sheet and income statements on the same basis as you filed your firm’s federal income tax returns on. If you prefer to provide your financials on a different basis than what your federal income tax returns are filed, be prepared to be support any significant increase or decrease by backup documentation should the SBA request it.
Is it OK to use the tax returns as the financial statements?
No, you must provide a balance sheet and income statement prepared in accordance with generally accepted accounting principles or on an accepted cash basis. If you use QuickBooks, we suggest using the standard report as the copy to be submitted.
What minimum requirements must the current year to date balance sheet and income statement exhibit to meet the basic 8a eligibility requirements?
The current year to date financials must exhibit positive net income, positive total equity and positive working capital at a minimum.
What exactly does the SBA look for when they review and screen the current year to date financial statements?
a. Is the current year to date balance sheet and income statement no older than 90 days from date of receipt?
b. Have the balance sheets and income statements been prepared in accordance with generally accepted accounting principles or an accepted cash basis?
c. If the firm’s financials are prepared on an accrual basis, are the aging schedules for accounts payable and receivable consistent with the current year to date balance sheet provided?
d. Are there any accounts payable or receivable that are over 90 days old? If so, the SBA may discount these amounts and it could possibly reflect negatively on your firms potential for success criteria.
e. Does the firm have fixed assets? If so, are these fixed assets recorded properly? Are the fixed assets reported with depreciation or at actual value?
f. Do the firm’s fixed assets correspond with its type of business? For example, if the firm performs construction work does it have construction equipment? If you are a general contractor and your balance sheet exhibits no fixed assets (hammers, drills, construction equipment, etc.) your income statement should show leasing costs associated with the rental of equipment needed to perform its projects.
g. If the firm is a dealer, wholesaler, or supplier, does the firm maintain any inventory and is it shown on its balance sheets?
h. Are there loans or notes receivable from a shareholder, officer or partner listed on the balance sheet? If so, has a copy of the loan or promissory note been provided within the application paperwork? If the loan is from one of the applicants, has it been properly reflected on their SBA 413 form, personal financial statement?
i. Does the firm have the ability to service debts? (e.g. minimum of 90 days worth of working capital)
j. Are there any loans that are questionable or that may raise concerns regarding control? Does the firm have financing by non-disadvantaged individual(s) that would be considered critical financing? Also, is the loan payable upon demand? Do these loans reflect generally accepted repayment terms? If not, is this item over-inflating the firm’s assets?
k. Do the retained earnings reported reconcile with previous financial statements?
l. Does the listed business equity match that reported on the applicant’s SBA 413 Form, personal financial statement?
m. Does the profit and loss statement show revenues in the appropriate business activity (NAICS)?
n. Is “Cost of Goods Sold” included?
o. Are the line items recorded on the balance sheet and income statements consistent from year to year?
p. Does the income statement show an expense for employee salaries? Does it appear that the applicant is not the highest compensated? Are there indications that excessive withdrawals have occurred?
q. Does the income statement show an expense for insurance and if required, an expense for worker’s compensation?
r. Are there any large subcontracting expenses that appear questionable? A services related firm should not subcontract out more than 50% of the loaded labor portion of a contract. If you are a construction firm this percentage is 85% and 75% for construction trade (plumbing, electrical, etc.)
What exactly does the SBA look for when they review and screen your previous year end financial statements?
a. Are the year end balance sheet and income statements provided from the beginning of the calendar or fiscal year to their fiscal year ending date?
b. Does the revenue reported on income statements appear to be in the same in the same line of business from year to year?
c. What pattern are the revenues, profits, and losses showing? Is there a need to ask for clarification, such as an explanation of the reason for a downward trend or sudden revenue drop?
d. Are there any discrepancies between the firm’s tax returns and the financial statements? Are these discrepancies based on cash versus accrual? If not, is reconciliation required? Does taking into consideration cash versus accrual reconcile the accounts?
e. Do the balance sheets correspond with the tax return schedules? For example, are there shareholder loans on the tax return schedules that are not reflected on the financial statements?
f. Do the financial statements and corresponding tax returns reflect any conversions from accrual to cash accounting?