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PROBLEM - Low Business Cash Flow aka Low Debt Coverage Ratio’s



Of all the objections, not having positive cash flow is the hardest one to get over. 

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Cash flow is king as lenders demand to know how you are going to make their loan payments.  And when we say cash flow, we mean what you really make, with accounting items such as depletion, depreciation, prior year loss carry over’s, or other items such as rent paid to self, interest on debts being refinanced, etc taken out.

  

(This is just one page of the report.  Scroll below to see the other SOLUTIONS)

Banks are being shut down across the nation as the FDIC regulates them, so they are even more reluctant than ever, to take on businesses that are losing money.  To make matters worse, virtual no lenders will provide working capital to entrepreneurs to help carry them.
    

Debt Coverage Ratios – What it is and How it’s Calculated

Debt Coverage Ratio (DCR or DSCR) are an underwriting tool that examines the borrowers total available cash flow, that can be used to make the proposed loan payments.   So, banks take the total annual cash flow that a business makes and divides it by the proposed annual mortgage payments to come up with the ratio.   

The typical minimum Debt Coverage Ratio is a 1.25.    

In the chart below, the small business owner’s 2009 cash flow (referred to as “Total Cash Available For Debt Service) is $131,958, divided by the proposed annual mortgage payments (debt service) of $90,460.  So his DCR ratio in 2009 is a 1.46.  Again, $131,958/$90,460 = 1.46.  

The best way to figure this out is by examining the chart.  Note it is broken down over the last 4 years so that the bank employees can get a better feel for the historical cash flow of the business.  These numbers are taken off of the borrowers tax returns in 2008 ,2007, 2006 and off of his Year end Profit & Loss Statement for 2009.   

SEE CHART HERE

 

SOLUTIONS To Low Cash Flow/ Low Debt Coverage Ratios

In general, what you need to do is try to establish that 1. you have “Hit Bottom” with your net income and are in a recovery type phase or 2. that the proposed loan will put you in a very strong position.   But here are some specific solutions:

1.       Bring on a partner that has more cash, cash flow, assets and experience than you do.  You can build an argument around that the new partner has or will help re establish your business. 

a.  If you have not already brought the new partner on, you can structure the new loan based on his strengths and vision for the changes in your business.  It can be structured almost like a projection type loan, which was pretty common.   You will need to put together a detailed projection and assumptions (notes) on why this will work and immediately improve your cash flow. 

b.  If the partner is already on board, you will have to show how and why this has helped your business to this point.  Putting together a Profit and Loss statement broken down over the last 12 months is a great way to demonstrate a turn around.  If your new partner has enough assets, you maybe able to just present those to the bank and you will be fine. 
  

2.       Do everything in your power to pay down debt.  Getting rid of business credit cards, lines, equipment loans, vendors, private notes will have an immediate effect on your cash flow and improve your Debt Coverage Ratio. Pay off all loans with the highest payments and lowest balances first.  This may or may not include your highest interest rate loans as some maybe on short amortization schedules, etc.  Do whatever you can to raise money, like collecting receivable, selling household goods (try eBay! Or Craig's List), tapping the cash value of your life insurance, bringing on partners/relatives/employees/ to have them pay down your balances, etc.  Any and all of this will help reduce your monthly payments, thus improving your cash flow position.

 

3.       Find a more aggressive bank.  There are still banks and lenders out there that will still go down to a 1.1 DCR.  They are rare now, but still out there.  Also some banks simply calculate cash flow differently. 

 

4.       Consider a business debt consolidation loan.  Often business owners have multiple types of loans that will have various amortization schedules, interest rates, equipment lease periods, etc.  Often by refinancing all of this debt onto a commercial mortgage such as a SBA 7a loan, the cash flow savings can be tremendous.  Restructuring debt can put a business back in business over night and drastically improve DCR’s.  Note however that getting these types of loans closed are not so easy.  Go to the above link to research the issues.      

 

5.       Make sure that the your personal or business expenses are not being double reported by the underwriter/loan officer.  Items such as business car payments or business credit cards will often show on your personal credit report (because you have personal guaranteed the loan).  You want as much of this debt to be attributed to your business as possible.  Because business expenses are put on a more lenient underwriting calculations at a 1.25 ratio vs being DOUBLED on the personal expense side.  And you definitely only want the debt counted once.  Mistakes happen all the time.  So you should take the time to explain to the loan officer that certain items on your credit report are actually business expenses and are already included on your business tax returns/year to date financial's.  As loan officers rush through deals, this is a common mistake.  

 

Lack of cash flow is a difficult objection to get over.  However, if you can demonstrate that your business has stabilized and that the loan will further improve your cash flow position you should be able to get the capital you’re seeking. 



Continuation of Report:  Other Common Causes of Small Business Loan Decline and Their SOLUTIONS 
  • Small Business Loan Help Beginning of Report
  • Dealing With Bankers An overview of how an imperfect loan submission process works, and strategies on how to overcome it. 
  • Commercial Loan Solutions General Overview of most of the Solutions.
  • How To Research Banks & avoid working with SICK banks.
  • High Loan To Value How to deal with being over leveraged.
  • Declining Gross Revenue Get over declining gross sales.
  • Disadvantages & Advantages of Partnerships Specifically related to loan requests.

  • Low Business Cash Flow AKA low debt coverage ratio's & what potential solution are.
  • Low Liquidity or to little cash, relative to the loan request.
  • High Personal Debt your personal expenses have a big impact on your cash flow, see some solutions here.
  • Bad Personal Credit Scores Best solutions to getting over low credit scores.
  • Business Debt Consolidation Loans have their own set of issues, learn best solutions here.
  •  Problems With Other Sources of Income also referred to as Affiliates
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