When a lender pulls up a profit and loss statement, they are not reading it the way the business owner reads it. They are not looking at the bottom line and feeling good or bad about it. They are running a mental checklist – one most referral partners never see.
If you want to close more deals, you need to read the P&L the way they do. Not after the file gets declined. Before you ever send it.
This is not about becoming an underwriter. It is about knowing what they are going to find before they find it – and either fixing it, explaining it, or deciding it is not the right product.
Start With Revenue, But Not the Way You Think
The first thing a lender looks at is not how much revenue the business made. It is how that revenue behaves.
Is it consistent month to month? Or does it spike in Q4 and go quiet in January? Is there one customer or contract driving 60 percent of the top line? Does it trend up, hold flat, or slowly erode?
A business doing $2 million a year with steady, diversified revenue looks completely different to a lender than a business doing $2 million a year with three good months and nine unpredictable ones. The number is the same. The risk profile is not.
When you are reviewing a P&L with a client, look at monthly revenue if you can get it. Annual figures flatten everything. Monthly figures tell the story.
Gross Margin Is the Number That Gets Skipped
A lot of people skip past gross profit and go straight to net income. Lenders do not.
Gross margin – revenue minus cost of goods sold – tells a lender how efficiently the business converts sales into actual dollars before overhead. A thin margin business running at 15 percent gross is a completely different conversation than a service business running at 65 percent. The same net income means something different in each.
If your client is in retail, construction, or food service, expect tight margins. Know that going in. If the gross margin looks out of line for the industry, a lender will notice, and they will ask questions. It is better if you are already ahead of the answer.
Also watch for cost of goods sold that fluctuates wildly without a clear explanation. That can indicate inconsistent accounting, vendor issues, or inventory problems – none of which make a lender comfortable.
What Operating Expenses Actually Signal
Operating expenses are where a lot of referral partners stop paying attention. That is a mistake.
Lenders are looking at a few things inside the operating expense section:
- Owner compensation – is it reasonable, or is the owner paying themselves $30,000 a year to inflate net income, or $400,000 a year to make sure there is nothing left?
- Officer or related-party expenses – are there payments flowing to family members, related entities, or management companies that obscure the real cost structure?
- Non-recurring items – did the business have a one-time legal settlement, a major equipment write-off, or an insurance payout that distorted the year?
- Rent – is it at market rate, or is the owner paying above-market rent to a related entity they also own?
None of these automatically kill a deal. But all of them require explanation. If you spot them first and document them cleanly, you make the underwriter’s job easier. If they surface it and you did not mention it, you lose credibility – and sometimes the file.
The Addback Conversation
This is where deals get saved or lose real money on the table.
Lenders calculate what is called adjusted net income – the real cash the business generates after stripping out non-cash charges, one-time expenses, and owner-related items that do not reflect ongoing operations. This adjusted number is often called EBITDA, seller’s discretionary earnings, or cash flow depending on the context and the lender.
Common legitimate addbacks include depreciation, amortization, interest expense on existing debt, one-time professional fees, and above-market owner compensation. When these are properly documented and presented, they can increase the qualifying income significantly.
The mistake I see constantly is referral partners submitting a P&L with a low net income number and letting the lender figure out the addbacks on their own. Some lenders will do it. Many will not. And the ones who do it themselves may not catch everything – or may be more conservative in what they allow.
Do the addback analysis before you submit. Present it as a clean schedule with documentation. Own the narrative.
A Simple Framework for P&L Review
Here is the mental checklist I use before I ever send a file. It is not complicated. It is just consistent.
| What to Look At | What You’re Actually Asking |
|---|---|
| Revenue trend | Is it growing, flat, or declining? Is it consistent or erratic? |
| Revenue concentration | Is one customer or season driving most of it? |
| Gross margin | Does it make sense for this industry? Is it stable? |
| Owner compensation | Is it at market rate? Is it obscuring real cash flow? |
| Non-recurring expenses | What happened that won’t happen again? |
| Related-party transactions | Is money moving to entities the owner also controls? |
| Net income before addbacks | What does the lender see first? |
| Adjusted cash flow | What does the business actually generate after you clean it up? |
Run through that list before every submission. Not as a formality – as a discipline.
Year-Over-Year Changes Require Explanation
If you are submitting two or three years of P&Ls and there is a significant swing in revenue or expenses from one year to the next, you need to explain it in your cover memo before the lender asks.
A 30 percent revenue drop in 2020 has a story. A 40 percent jump in operating expenses in 2023 has a story. A year where net income goes to zero has a story. Lenders are not going to assume the best version of that story. They are going to assume the worst until someone explains it.
That someone is you.
A one-paragraph narrative that explains a revenue dip, ties it to a specific event, and then shows the recovery trend turns a red flag into context. Without it, you are leaving the underwriter to fill in blanks – and they do not fill in blanks in your favor.
What a Clean P&L Presentation Looks Like
I have received thousands of files over the years. The ones that close fastest share a few things in common.
The financials are organized. Two or three years of P&Ls, formatted consistently, with a clear label on each year. If the books are internally prepared, there is an explanation of who prepared them. If there is an accountant, their contact information is included.
There is an addback schedule. Not buried in a memo – a separate, clearly labeled document that shows starting net income, each addback with a dollar amount and a one-line explanation, and a final adjusted cash flow figure.
There is a narrative. Two to four paragraphs that explain who the business is, what it does, why the owner needs this capital, and any anomalies in the financials. Not a sales pitch. Just context.
When I get a file like that, I can move. When I get a file that is just PDFs dumped into an email, I have to go back and forth four times before we even get to underwriting. That costs time. And in lending, time kills deals.
The P&L Is Not the Whole Picture – But It Is the Starting Point
Tax returns often tell a different story than the P&L. Bank statements often tell a different story than the tax returns. A lender is going to look at all three. Your job is not to hide the differences – it is to explain them.
If the P&L shows $250,000 in net income and the tax return shows $80,000, you need to know why. Maybe the business uses accelerated depreciation. Maybe there are legitimate timing differences. Maybe the books need to be cleaned up before you submit anything. Whatever the reason, you should know it before the lender asks.
The referral partners who close deals consistently are not just connectors. They are advocates. They understand the file. They anticipate the questions. They present the story in a way that makes the lender’s job easier.
Reading a P&L like a lender is not an advanced skill. It is a basic one. But most people never develop it – and that gap is exactly where deals get lost.
You Do Not Have to Do This Alone
If you have a client whose financials are complicated, unclear, or just messy – and you are not sure how a lender is going to read them – that is exactly the conversation I want to have with you before the file goes anywhere.
We can walk through the P&L together, identify the issues, figure out what can be cleaned up and what needs to be explained, and put together a submission that gives the deal the best possible chance. If it is not fundable, I would rather tell you that in 20 minutes than waste six weeks finding out.
If you have a deal that does not fit the usual box, let’s talk.
