How to Borrow Long Term on Accounting Transactions

Certain creditors may require borrowers to maintain accounting ratios, such as debt-to-equity or fixed-charge coverage.

Consistent accounting procedures are important in generating reliable financial statements for third parties such as analysts, investors and creditors. Banks and private lenders frequently require long-term borrowers to maintain certain minimum accounting ratios relating to the company's solvency and creditworthiness. Accordingly, it is important for a company to be able to comply with accounting transaction requirements when seeking long-term financing.

Instructions

1. Obtain credit approval. In seeking bank financing, the first step in long-term borrowing is a credit check. This may require the company to provide its tax ID number, a third-party credit report or an audit from an independent accountant to validate historical accounting transactions and financial records.

2. Negotiate credit terms with the prospective lender. Long-term debt is rarely a take-it-or-leave-it situation. Savvy debtors negotiate key terms with their lender so that they can be sure to meet all lending requirements, including preparing standard financial statements and properly substantiating important accounting transactions.

3. Maintain GAAP-compliant accounting records. Whether long-term borrowing is in the form of bonds or promissory notes, lenders typically require that debtors maintain and periodically provide GAAP-compliant accounting records; GAAP means generally accepted accounting principles. To ensure accounting transactions are reported properly, debtors often engage a certified accountant to prepare and review their financial statements.

4. Comply with all applicable debt covenants. Accounting transactions support long-term borrowing as long as the debtor maintains the required solvency ratios, overall debt ratios and minimum financial reserves. Despite making timely payments, if a debtor fails to provide compliant accounting transactions and records thereof, he may technically breach the various debt covenants and thereby default on the debt.

References

• NetMBA.com: Financial Ratios
• Dun & Bradstreet: Solvency Ratios
• SBA.gov: Business Loan Application Checklist