A Step-by-Step Guide to CPA Loans

Operating a CPA firm involves many of the same financial challenges as other businesses, including payroll, equipment, marketing, and seasonal fluctuations in revenue. While CPAs are often the ones advising business owners about managing cash flow and securing financing, many find it challenging to borrow money for their own business. Whether the goal is expansion, covering off-season gaps, acquiring another firm, or simply improving liquidity, a CPA loan can be the right choice. This guide outlines why CPAs need to borrow, the available loan options, and financing alternatives to consider.

Why CPAs Seek Business Loans

CPAs pursue business financing for many reasons. One of the most common is to smooth out fluctuations in revenues due to tax season deadlines.

As the business grows, many CPAs seek to expand, which may involve opening a second office, remodeling an existing space, or upgrading technology. CPA firms may need money to hire additional staff during peak times or invest in marketing to attract higher-value clients for its CPA services for small business. You may also need to borrow when purchasing new equipment, like computers, servers, or software systems.

When a partner retires, you may need a loan to buy out their share. Or the firm needs to borrow money to acquire another practice.

CPA loans also allow entrepreneurs to reduce interest costs by consolidating existing debt.

Organizing Financial Statements

Before applying for any CPA loan, it is important to have complete and accurate financial documentation. While requirements vary from one lender to the next, most lenders will request the following documents:

• Business tax returns for the past two to three years
• A year-to-date income statement and current balance sheet
• Cash flow statements
• Personal tax returns
• Personal financial statement
• Three to six months of business bank statements
• A list of outstanding business debts and their minimum required payments
• Business ownership documentation and legal structure
• Purchase order or contract (if buying equipment) or offer (for a building)

If the loan will be used to grow or acquire a business, lenders may also request financial projections for the next 12 to 24 months. These do not have to be overly complex, but they should clearly show expected revenue, expenses, and the ability to make all loan payments on time.

If your business has experienced a dip in revenues or profitability, be prepared to explain why. Lenders are more likely to approve a CPA loan when the applicant acknowledges past challenges and outlines a plan for moving forward.

Reviewing and Improving Credit

Business credit plays a major role in most CPA loan decisions. Applicants should check their business credit reports from Dun & Bradstreet, Experian Business, and Equifax Commercial. Errors should be corrected, and any outstanding balances should be resolved when possible.

Personal credit scores also affect loan approval, particularly for sole proprietors or firms with limited credit histories. However, if you have higher scores, you may be able to qualify for loans with better terms and lower rates.

Applicants should take steps to boost their credit scores to ensure they qualify for the most favorable terms. These steps include paying down credit card balances, avoiding new credit inquiries, and making all payments on time in the months leading up to an application.

If the business does not yet have a strong credit profile, opening a business credit card or establishing trade lines with vendors can help build one.

Defining Loan Needs and Goals

One of the most important steps is clearly defining how much money is needed and what it will be used for.

The repayment period should match the purpose of the loan. A short-term working capital loan may be paid off within one to two years, while you may need five to ten years or more to pay off long-term investments.

Carefully evaluate how much the business can afford to repay each month. Borrowing too much can create unnecessary financial strain, while borrowing too little may prevent the firm from meeting its objectives. Compare how much additional revenue you'll earn or extra expenses you'll avoid against the cost of the loan to determine if borrowing makes financial sense.

Traditional CPA Loan Options

Most CPAs begin by exploring traditional business financing products. These options are widely available and generally have more favorable terms. Remember that having a down payment when buying equipment, purchasing a building, or adding other assets can reduce the amount you need to borrow and lower your monthly payments.

Term Loans

Term loans provide a lump sum up-front that is repaid in fixed installments over a set period. They are ideal for office upgrades, major purchases, or expansion projects. Loan terms typically range from one to five years and include a fixed interest rate.

Business Lines of Credit

A line of credit allows the borrower to draw funds as needed, up to a pre-approved limit. Interest rates are variable, which can increase your costs over time. However, interest is charged only on the amount used. As you repay your balance, you free up your credit limit for future borrowing needs. This option is well-suited for managing seasonal revenue gaps or covering short-term expenses.

Business Credit Cards

Business credit cards are convenient for smaller expenses such as travel, subscriptions, or office supplies. They are easy to use but should be paid off monthly to avoid high interest costs. Some business credit cards offer rewards such as cash back, airline miles, or hotel points. You may be able to add free employee cards to track their expenses and assign costs to clients.

SBA Loans

Small Business Administration loans include the SBA 7(a), 504, and Express (microloan) programs. These loans are partially guaranteed by the government, which allows SBA lenders to offer lower interest rates and longer repayment terms. Accounting SBA loans are especially useful for CPAs who are expanding or refinancing at better terms. The application process can take longer, but it’s worth considering for larger loan amounts.

Equipment Financing

This option is used to purchase technology or office equipment. An equipment lease is a solid choice when the purchase price is high or when you want to replace the equipment with new versions as they are released. The equipment typically serves as collateral for the loan, making it easier to qualify.

Alternative CPA Financing Options

For firms that require quick funding or have limited credit, alternative financing options may be a more realistic option. These should be reviewed carefully, as costs and repayment structures vary.

Invoice Financing

Firms that bill clients with 30 or 60-day terms can use unpaid invoices as collateral. Lenders advance a percentage of the invoice value, and the remaining amount is paid once the client settles the bill.

Home Equity Loan

CPAs who own their home may choose to borrow against home equity to fund their business. This option involves personal risk and should only be considered when all business borrowing options have been exhausted. If you're unable to make payments, you could lose your home.

Personal Loan for Business Use

If the business is new or lacks credit history, some CPAs use a personal loan to fund operations. Loan terms and rates are based on the individual’s credit score and income, rather than the business's financials.

Peer-to-Peer Lending

Online platforms offer loans funded by individual investors. Often, funding is pooled from numerous investors to meet your target loan amount. These loans may have less stringent requirements but can also come with higher interest rates. Please note that your loan may not be funded if investors decide not to invest in your loan application.

Revenue-Based Financing

This method allows borrowers to repay a fixed percentage of their monthly revenue. It is flexible in terms of repayment timing but may be more expensive over time. It can be harder to budget your monthly payments and plan for the future since payments are not constant.

Choosing the Right Lender

Once the loan type has been selected, the next step is identifying the appropriate lender. Each option has its own process, timeline, and requirements.

Banks

Traditional banks offer competitive rates and terms for qualified applicants. These institutions are best suited for established firms with consistent revenue and solid credit.

Credit Unions

Credit unions may offer more personalized service and flexible underwriting. Membership may be required, but many small CPA firms benefit from the relationship-focused approach.

Online Lenders

Also known as fintech lenders, these platforms often approve applications quickly. They can bemore lenient with credit requirements but typically charge higher interest rates and fees.

The Bottom Line About CPA Loans

Securing a CPA loan requires careful planning, but the process is manageable with the right preparation. As a CPA, you already have a strong understanding of financial principles. Applying that knowledge to your own business can help you choose the right loan, present a strong application, and use the funds effectively. There are many CPA loan offers available, each with its own benefits and risks. Take the time to compare your options, choose a lender that fits your goals, and approach the process with the same professionalism you provide to your clients.

Frequently Asked Questions About CPA Loans

1. What is a CPA loan, and how is it different from other small business loans?

A CPA loan is a business loan that is used by accounting professionals to support or grow their firm. While they are similar to other small business loans, they are often tailored to the needs of CPA practices.

2. Can I get a CPA loan if I am a sole practitioner?

You don’t need to have an LLC, C-Corp, or S-Corp to get approved for a loan. Approval typically depends on your personal credit, business income, and how long you've been in business.

3. What credit score do I need to qualify for a CPA loan?

Most lenders require a personal credit score of 670 or higher. While some accept lower scores, you can expect to pay higher rates and fees than someone with good to excellent credit. Business credit may also be reviewed for larger loan amounts.

4. Are there CPA loan options for acquiring another accounting firm?

Term loans and SBA loans are commonly used to finance firm acquisitions. A solid plan and financials from both firms are usually required.

5. Can CPA loans be used for marketing or technology upgrades?

CPA loans can cover marketing, software, equipment, or any other business-related investment that supports growth or efficiency.

Frequent searches leading to this page