How to build a small business pro forma a lender will believe

Sooner or later someone asks for one. The bank wants it with the loan application, the landlord wants it before signing a second location, the broker selling you a business wants to see how you'll pay for it. "Send over your pro forma" lands in an inbox and the owner opens a blank spreadsheet.

That blank spreadsheet is the mistake. The pro formas that get approved aren't the most ambitious ones. They're the ones that start from the business as it actually runs and change one thing.

What is a pro forma for a small business?

A pro forma is your financial statements projected forward "as if" something happens: as if you take the loan, open the location, or buy the company. It is the income statement, balance sheet, and cash flow statement, linked together, usually three years out with the first year shown by month.

It isn't your budget, which is a target you commit to, and it isn't your forecast, which is where you expect this year to land. A pro forma answers one question for someone else: what does this business look like after the decision they're being asked to fund?

When will someone ask you for one?

Almost always when money or a long commitment is involved. The common ones:

• A bank or SBA loan, especially for equipment, real estate, or a young business.
• A lease on a second location, where the landlord wants to see rent covered.
• Buying a business, where the lender funds most of the price and wants both companies combined.
• An investor or a new partner buying in.

Each one wants the same three statements. What changes is the one decision laid on top.

Why should a pro forma start from your actual numbers?

Because the first thing a lender does is put your projection next to your last twelve months. If year one shows margins you've never earned, the whole document loses credibility, including the parts that were right.

Starting from actuals also saves you most of the work. Your growth rate, margins, fixed costs, and how long customers take to pay are already in your books. You're not inventing twenty assumptions, you're adjusting four or five.

What goes into a pro forma?

Fewer inputs than people expect. A small business pro forma runs on:

• Starting revenue and a growth rate.
• Gross margin, the share of each sale left after direct costs.
• Fixed costs per month, plus variable costs as a share of revenue.
• How many days customers take to pay, how long inventory sits, and how long you take to pay suppliers.
• Equipment spending, loan balances, rates, and repayments.
• What you pay yourself, including distributions.

The statements must link. Profit flows into retained earnings, customer payments drive receivables, and the cash at the bottom of the cash flow statement matches the cash on the balance sheet. If yours doesn't balance, a banker will spot it in minutes.

How do you show a loan in a pro forma?

The loan adds cash (or equipment) on one side and debt on the other. From then on, interest goes through the income statement and principal comes out of cash. Your P&L will never show the principal, which is why the lender runs a separate test: debt service coverage, the cash your business generates divided by every loan payment due that year, old loans included.

Take a business earning $140K a year before interest, taxes, and depreciation. It already pays $48K a year on an existing loan and wants $250K more over ten years at 10%. The new payments are about $39.6K a year.

At 1.60× the loan is comfortably covered. Drop earnings to $105K and coverage falls to 1.20×, under what most banks accept. Knowing that number before you apply tells you whether to borrow less, stretch the term, or wait a year. The other numbers a lender checks come from the same three statements.

How do you build a pro forma for a new location or a big hire?

Add the new fixed costs, the upfront spend, and the revenue it brings. Then be honest about timing. Rent and salaries start on day one; revenue ramps. The number to look for is the low point in cash during the ramp, not the profit in year three.

The quiet cost is working capital. More sales mean more money sitting in receivables and inventory before it turns into cash, which is how a business ends up profitable but broke. A linked pro forma shows it for you, because receivables grow with revenue. A P&L-only projection hides it.

How do you build a pro forma for buying a business?

Combine the two companies, then add the deal: the price, your down payment, the loan for the rest, and its payments. Lenders will look at coverage on the combined business, so the target's profit has to be real profit.

That means adjusting the seller's number. Sellers often quote earnings with their own salary added back. If you'll need to hire a manager to replace them, that salary goes back in as a cost. A deal that covers its payments at 1.4× on the seller's number can fall below 1.0× once someone is paid to run it.

What makes a lender distrust a pro forma?

• A hockey stick: flat for years, then 40% growth starting the month after funding.
• Margins that improve with no reason given.
• No working capital, so cash rises exactly as fast as profit.
• No salary for the owner, which flatters every profit line.
• A balance sheet that doesn't balance.
• One scenario only. Show a downside case where revenue comes in 15% light, and show the loan still gets paid.

The downside case does more for your credibility than the upside. It tells the lender you've already asked their question.

How do you build one in an afternoon?

Pull your last twelve months of P&L and your current balance sheet. Set revenue, margins, and fixed costs from those. Add the one decision you're asking about. Check that the balance sheet balances, read the coverage ratio, then run the downside case. Write two or three sentences explaining every assumption that differs from your actuals.