It can be extremely difficult to get a bank loan to refinance your home or make home improvements. It’s even harder for family child care providers.
Why? Because when banks are determining if a child care provider can afford to pay back a loan, they will look at the child care provider’s profit. This is shown on the bottom line of IRS Form Schedule C Profit or Loss From Business.
Since many child care providers do not make a large profit, they are often turned down for a loan.
Is their anything a child care provider can do to improve her chances of getting a loan to buy, improve, or refinance their home? Yes.
Your Schedule C profit is not an accurate depiction of your ability to pay back a loan. This is because there are a number of expenses on this form that do not represent payments you made that year.
The first type is depreciation. When you buy an item that you depreciate (furniture, appliances, computers, home improvements, etc.), you spread the cost as a business deduction each year over a number of years. The amount of depreciation expenses that are shown on your Schedule C do not represent any actual expense to you for that year.
Therefore, they should not be counted as an expense when applying for a loan. These depreciation expenses appear on Schedule C, line 13. When applying for a loan, the amount on this line should be subtracted from your expenses, which will then increase your profit.
The same logic applies to house depreciation that appears on Form 8829 Expenses for Business Use of Your Home, line 41.
In addition, the remaining house expenses on Form 8829 exist even when you are not in business. They don’t represent costs associated with your business. Therefore, they shouldn’t be included on Schedule C when applying for a loan because they aren’t paid out of your business income. So, you should remove all of your house expenses from Schedule C, line 30.
After removing depreciation and house expenses from Schedule C, your profit will be larger and this may make a difference in qualifying for a loan.
Cash Flow Statement
If your bank officer won’t consider your revised Schedule C, your next step is to prepare a monthly cash flow statement. This statement shows the sources of your monthly income and a listing of your monthly expenses. This statement would not include depreciation or non-business expenses (such as your house expenses).
You can download a free cash flow template taken from my book Family Child Care Business Planning Guide. Click on the tab “Web Components.”
Bank officers are more likely to accept a cash flow statement, although you may still need to explain why this is a better reflection of your ability to pay back a loan than your Schedule C.
Should you reduce your expenses to show a larger profit?
Some providers consider reducing their business expenses to show a larger profit to better qualify for a loan. Is this a good idea?
Maybe. If you can reduce expenses over the next few months to show a higher profit in your monthly cash flow statement, this may be worthwhile to consider.
Before considering this idea check with your loan officer to see if this will matter. Often, they will only want to look at last year’s tax return. If this is the case, you may want to consider reducing expenses for the current year to show a higher profit on your tax return. Then reapply for the loan after filing your taxes at the end of the year.
Keeping your expenses low is always a good idea. See if you can find out exactly how much profit you will need to show to be eligible for the loan. Then you can budget your expenses to meet this goal.
One provider wanted to amend her last year’s tax return by not claiming $6,000 in food expenses and thus showing $6,000 more in profit. This would only be wise if your loan officer guarantees that you will get the loan. I doubt that he/she will agree to that.
Don’t give up if one bank turns you down. Go to the next one. A credit union or neighborhood bank may be more receptive to your loan application than a big bank.
What did you do that made a difference when you applied for a loan?
Image credit: https://www.flickr.com/photos/jeremybrooks/
For more information, see my book Family Child Care Business Planning Guide.