Financing When Tax Returns Are Significantly Lower Than Actual Financials

March 08, 2025

by a searcher from Georgia Institute of Technology - Ernest Scheller Jr. College of Business in New York, NY, USA

Has anybody ever successfully navigated a situation where a business would easily meet the required financial metrics for an SBA loan based on its true financials, however, the tax returns show significantly lower earnings than the business actually makes? I have a business that is ready to go under LOI with ~$400k of SDE, but the tax returns show earnings closer to $100k. Few items driving the delta are owner running personal expenses through the business, some unreported revenue, timing of cash vs accrual accounting, etc. Seems like most if not all SBA lenders will look at the tax returns as the primary source of financials but would love to speak to anybody who has ever dealt with this situation (Whether you were able to successfully get the SBA loan or figured out an alternative source of financing).

Reply by a lender
from University of Southern California in Los Angeles, CA, USA

Hi Shane - Most SBA lenders won't be able to do this deal. Most SBA lenders rely heavily on tax returns when assessing debt service coverage, typically requiring 1.25 coverage for two consecutive years (though some may accept 1.15 for at least one year). When calculating DSCR, lenders will look at the adjusted EBITDA and give you credit for legit add backs. Some personal expenses are legitimate add backs but unreported revenue is not.

If the most recent tax return does not support the required DSCR, the deal likely won’t qualify. A potential solution is for the seller to file 2024 tax returns showing his actual earnings to meet the DSCR requirement. If the returns demonstrate at least one year of 1.15x DSCR, a lender may approve the loan. Otherwise, alternative financing options may be necessary. I’d love to help you find the right SBA lender for this deal. We work with all the major SBA lenders. The bank pay us after your loan closes. For this deal, I think a 2024 tax return will need to be filed. You can reach me here or directly at redacted You can also click here to schedule a meeting with me: https://cal.com/ishan-jetley-3d73m8/30min. Look forward to chatting!

Reply by a searcher
in Houston, TX, USA

"Some unreported revenue" should be a major red flag. If the seller is underreporting income, what other financial misrepresentations might exist? This could signal deeper fraud issues. A proof of cash is essential, and the seller should also cover part of the cost of a QoE if they want to substantiate their numbers.

Even with a tax reconciliation, if the seller's add-backs aren't explicitly supported by tax returns, securing financing will be extremely difficult. SBA will be near impossible and the deal is already too small for conventional banks that would rely on a QoE.

Why not focus on a better deal? If the seller is serious, they should be willing to finance 100% of the purchase. Time is money - don’t waste it on a questionable transaction.

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