Common Pitfalls Contractors Make When Seeking Bank Financing Part II

By John Kraus, Premier Credit Insights & Solutions LLC

In Part I of this series, we discussed why gross profit margins matter more than most contractors realize. Gross profit is often the foundation upon which lenders evaluate a contractor's ability to generate cash flow, absorb unexpected project costs, and ultimately repay debt.

But strong gross profit margins alone are not enough.

Banks must be able to verify them.

That is where financial reporting becomes critically important.

As contractors grow, so do their financing needs. Working capital lines increase. Equipment purchases become larger. Bonding capacity expands. Construction projects become more complex. At that point, lenders require financial information that provides a timely, accurate, and complete picture of the business.

Over more than four decades evaluating commercial loan requests, I found that many financing requests were delayed—not because the contractor lacked a profitable business—but because the financial reporting did not provide lenders with the information needed to make sound credit decisions.

The following are some of the most common reporting weaknesses I encountered.

1. Relying Too Heavily on Tax Returns

Many contractors assume their business tax return provides everything a bank needs.

It rarely does.

Tax returns are designed primarily to comply with tax laws—not to measure a company's financial strength from a lending perspective.

Many contractor tax returns are prepared using either the cash basis or the completed-contract method of accounting. While those methods may be appropriate for tax purposes, they often fail to present an accurate picture of the company's current financial condition, especially for growing contractors with multiple jobs in progress.

As projects become larger and financing needs increase, banks generally place greater reliance on financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) using the percentage-of-completion method.

This method provides lenders with a more meaningful picture of:

• Revenue earned to date

• Costs incurred

• Gross profit by project

• Work completed versus remaining

• Overall financial performance

Simply put, lenders need to understand how the business is performing today—not simply what happened for tax purposes last year.

2. Outdated Financial Statements

Timeliness matters.

Financial statements that are several months old often leave lenders asking an obvious question:

"What has happened since these numbers were prepared?"

Throughout my banking career, I saw situations where contractors experienced delays in funding requests—not because of credit quality—but because required financial reporting had not been submitted.

This often included:

• Interim financial statements

• Work-in-process (WIP) schedules

• Accounts receivable aging

• Accounts payable aging

• Covenant reporting required under the loan agreement

When lenders cannot determine a borrower's current financial position, they naturally become more cautious. Credit decisions slow down, line advances may be postponed, and additional questions inevitably follow.

Good reporting helps keep the lending relationship moving efficiently.

3. Weak or Incomplete Work-in-Process (WIP) Reporting

As a commercial lender, this was one area I placed tremendous emphasis on. For many contractors, the WIP schedule is one of the most important documents a lender reviews.

It tells the story behind the financial statements.

A quality WIP report allows the bank to monitor:

• Which projects are performing well

• Which jobs are experiencing losses

• Cost overruns

• Change orders

• Estimated costs to complete

• Gross profit trends

• Underbillings and overbillings

• Overall project performance

Lenders are not simply reviewing numbers. They are evaluating whether management understands the financial performance of every significant project and is identifying problems early—before they become cash flow problems.

A contractor who maintains detailed, accurate WIP reporting demonstrates financial discipline, strong internal controls, and effective project management. Those qualities increase lender confidence.

4. Interim Financial Statements That Don't Tell the Same Story

Interim financial statements should build logically from one reporting period to the next. Unfortunately, that is not always the case.

Common issues include:

• Numbers that do not reconcile with prior reports

• Missing account detail

• Significant unexplained fluctuations

• Inconsistent presentation from month to month

• Statements prepared without supporting schedules

When lenders spend excessive time trying to reconcile financial statements, confidence in the information begins to decline.

Consistency is often just as important as accuracy.

5. Accounts Receivable and Payable Schedules That Don't Reconcile

Accounts receivable and accounts payable aging schedules should reconcile to the financial statements. Surprisingly, they sometimes do not.

When aging schedules differ from the balance sheet, lenders naturally begin asking questions:

• Are collections slowing?

• Are suppliers being paid on time?

• Are there disputed invoices?

• Is cash flow becoming strained?

• Are recordkeeping, billing procedures, and collection practices being properly managed?

Even relatively small discrepancies can create unnecessary concern.

Reconciling supporting schedules before submitting a loan package demonstrates attention to detail, strengthens management credibility, and helps build lender confidence.

Banker's Takeaway

Contractors often believe banks are simply reviewing financial statements.

In reality, lenders are evaluating something much broader.

They are assessing the quality of management.

Timely, accurate, and well-organized financial reporting tells lenders that management understands the business, closely monitors project performance, and maintains the financial discipline necessary to manage a growing company. Those characteristics build lender confidence and often distinguish contractors who obtain financing efficiently from those whose requests become delayed—or declined.

The most successful contractors recognize that strong financial reporting is far more than an accounting exercise. It is an essential management tool that supports better decision-making, strengthens banking relationships, and positions the business for long-term growth. As financing needs expand, disciplined financial reporting becomes one of the strongest indicators of a contractor's creditworthiness.

Just as importantly, banks and surety companies (bonding companies) frequently view one another as strategic partners in evaluating a contractor's financial strength. Contractors pursuing larger projects often require both increased banking capacity and expanded bonding support. Each institution understands the critical role the other plays, and both rely heavily on the quality, consistency, and timeliness of a contractor's financial reporting when assessing risk.

Contractors who invest in strong financial reporting are not simply improving their chances of obtaining financing. They are building the credibility and confidence that support lasting relationships with both their lenders and bonding companies—relationships that can help fuel sustainable growth for years to come.

How Premier Credit Can Help

At Premier Credit Insights & Solutions, we help contractors prepare for financing by viewing their business through the same lens commercial lenders use every day.

Our "Think Like the Bank®" approach goes beyond simply assembling financial information. We evaluate your company from an underwriter's perspective, identifying potential concerns before they become obstacles to financing.

Our advisory services help contractors:

• Evaluate the quality and completeness of financial reporting.

• Review work-in-process (WIP) reporting and job costing practices.

• Assess liquidity, leverage, and cash flow from a lender's perspective.

• Identify potential underwriting concerns before approaching a bank.

• Strengthen presentations to lenders and bonding companies.

• Improve overall bank readiness for lines of credit, equipment financing, construction loans, and growth capital.

The goal is not simply to obtain financing.

The goal is to become the type of borrower that banks and surety companies view as well-managed, financially disciplined, and worthy of a long-term relationship.

Think Like the Bank®—and you'll be better positioned to earn the confidence that supports both financing and bonding capacity as your business grows.

To learn more, or to request our complimentary Contractor Bank Readiness Checklist, visit Premier Credit Insights & Solutions or contact us to schedule an initial consultation.

Coming in Part III: Why Cash Flow—Not Profit—is Often the Real Reason Contractors Are Declined.