When you visit your lender to borrow money for your business or buy commercial real estate, one of the first documents the loan officer asks for is your personal financial statement (PFS). These statements come in a multitude of formats based on the need of the financial institution. The basic premise for each is to determine your assets (property owned) and liabilities (who and how much you owe).

A prudent lender advises his or her customers to be accurate in the evaluation of assets and in the amount of liabilities. Most people preparing a financial statement want to show the maximum amount of assets owned and the least amount of liabilities. While this is not the proper thing to do, it can easily be the most natural. In this way, the customer will have a favorable net worth.

I suggest to my customers that they use good judgment when placing a value on assets. In most instances, the values can be supported with documentation, which can be attached to the PFS. Documentation of liabilities comes in a simple form: a recent statement from the creditor.

In regards to assets, many customers list face value of life insurance policies. I’ve never seen a PFS requiring this to be listed as an asset. The statement does, however, include a space for Cash Surrender Value of Life Insurance (CSVLI), or funds that can be used as collateral for a loan. A printout of this asset may be obtained from the insurer and should be attached to the PFS. All cash items (checking and savings accounts, IRAs and CDs) can be confirmed with a recent bank statement. If there's any doubt about the value of real estate, attach the most recent Ad Valorem Tax Notice to the PFS. This notice from the appraiser's office may include a tax assessment value and a fair market value.

Accurate liability disclosure is critical to the overall value of the PFS. I urge each customer to attach a current statement from each creditor if there is any doubt as to the balances owed. One of the first transactions by the lender is to order a credit report on the customer. Once these reports are received, they're matched to the liabilities listed in the PFS. If a substantial variation exists in the balances shown, it raises concern.

The customer may not be a credible manager or is attempting to make a false statement. Those customers applying for a loan from the Small Business Administration (SBA) will prepare the SBA Form 413, PFS. Prior to the signature line, the customer acknowledges that if a false statement is made in an attempt to obtain a loan, they can be prosecuted by the U.S. Attorney General and forfeit all benefits. Therefore, you must be as accurate as possible in your disclosure.

There are many reasons why a lender needs accurate financial information from a potential borrower. First, it helps the lender determine cash equity injection that as part of the overall finance plan. For example, if the borrower is required to inject cash in the amount of $20,000 into a business venture, there must be evidence that these funds exist. Therefore, a recent bank statement should be attached to the PFS to verify the existence of the funds.

A second reason for accurate data is to verify financial depth. When a loan is made, it is amortized over a specific term. During this time, the lender is looking for assurance that the borrower will have sufficient cash reserves to carry the business through any difficult period; an extremely complicated item to measure.

Lenders and the SBA require that a borrower prepare a PFS annually, providing accurate and current information for personal estate and financial planning. PFS Form 413 forms may be found at www.sba.gov.

Fred W. Bower is vice president for Liberty National Bank.
He can be reached at (904) 737-1776 or via Email at
libjax@bellsouth.net or www.libertynationalbank.com.