Your taxes are a big determining factor in qualifying for a loan, and qualifying for a loan is a quick way to scale your business. If you’ve already proven profitable and you just need more tech and more hands to get everything done, then a loan is a surefire way to rapidly grow. This is one of the reasons, it’s a good idea to keep accurate books and a healthy tax history.
Having a strong financial statement and increasing your earnings before taxes (also known as EBIT) will help you qualify for a loan. Where many struggle however is how to increase their EBIT before the loan. It can feel like a catch 22. You need more money to scale, but to qualify for more money, you need to make more money. Here’s what you can do to increase your EBIT and help you grow your business.
Reduce the Cost of Goods Sold
Track all the goods you purchase for your business. These cost of goods (COG) reduce the profit your business is making. If it’s intended for resale, then obviously you can hike up the difference, but that might reduce the number of sales. Alternatively, you can buy your inventory from a seller that is willing to offer discounts. If it’s a SaaS company, many can lock you into a discounted rate for a longer term. Obviously, the less you spend the more you increase your EBIT. Keep the long-term in mind. Moreover, your relationship with these lenders and the discounts you receive are likely to work in your favor with lenders.
Reduction of Operating Expenses
Your operating costs can range from the rent, mortgage taken on the business premise, postage, insurance costs, and utilities among many others. If your monthly rent is high, you can look for premises of similar quality that charge less and move in. If the business premises are on the mortgage, you can choose to negotiate with your bank for lower interest rates. This can help you reduce your operating expenses.
Decrease Annual Depreciation Expense
This is one of the facets where having an accountant just makes sense. Someone whose job it is to keep track of this and provide expert opinions on it annually. So what are we talking about when we say “decrease annual depreciation expenses?”
For those that don’t know yet. When you buy something, such as a large piece of tech for the company. If, as an asset, it has a useful life span of 8 years and you purchase it for $60,000, then — although you could expense that in the first year, most business owners prefer to expense a portion so they can increase their net income year over year. As a bonus, if you’re able to sell the piece of tech at the end of its useful life, then you make additional profit. (Bear in mind, something like “land” cannot be depreciated as it’s a fixed asset.)
Having a CPA to keep track of your depreciated expenses is an excellent way to ensure you can increase your EBIT and qualify for a loan early and grow your business.