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PROBLEM:  High Personal Expenses/Debt


Personal expenses, also referred to as Personal Needs are one of the most common

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“deal killers” out there and cause a lot of frustration with borrowers.  A big part of the problem is how personal expenses are calculated and underwritten.  A lot of entrepreneurs are surprised to hear that personal expenses are such a problem, as a common perception is, “Why does the bank care what I have to pay in personal debt?  This is a business loan.” 


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

The problem is that they do care (a lot) - If the borrower cannot meet their monthly personal obligations, the business loan will soon be in trouble (or so banks assume).    

As just mentioned, another problem with personal expenses is how they are normally calculated.  Underwriters take all of the borrowers monthly expenses that are reported on their personal credit report, and DOUBLE that amount.  So, if you have a $1,500 mortgage payment, $1,500 of minimum credit cards and 2 car payments that total $1,000, your total monthly personal obligations are $4,000. 

Underwriters than take the $4,000 and DOUBLE it to $8,000 to represent the borrowers total personal expenses…  This $8,000 is than taken out of the businesses cash flow on their underwriting analysis.  See chart below. 

A huge point here is that they double personal expenses, while for business expenses they only put a 25% ratio on them.  So if the $1,500 a month of credit payments was attributed to the business, your Personal Needs would drop from $8,000 per month ($96,000 annual) to $5,000 per month ($60,000 annual)... 

That’s a huge difference on most small business loans that have “tight” cash flow as can be seen on the chart below.  The first scenario, with the $60,000 of personal needs is a doable deal.  However the second scenario with $96,000 of Personal Needs is NOT.  The Debt Coverage ratio drops to a 1.13, which is below most banks minimum of 1.25.   

SEE CHART HERE



Blended Personal and Business Expenses

Many small business owners have combined personal loans with their business expenses.  Blending personal credit cards and home equity loans with business expenses are the most common examples.  Because the debt is in the borrowers personal name, it is calculated on the personal ratios described above.  This is the almost always the case, even if the borrower can document that the balances where used for business expenses (Read more about “Use of Proceeds”).  The result is that the expenses take out a lot more of the businesses cash flow than need be, and kill a lot of small business loans.   

SOLUTIONS To High Personal Debt 

In many cases, fixing this problem is actually one that you have more control over, than the other problems discussed on this site.    

  1. First, pull your credit report and analyze all of your monthly payments.  Figure out which ones have the highest payments vs lowest balance owed.  Do your own cash flow analysis, like on the chart above, and recalculate not only what your potential personal expenses will look like, but also how it will affect your business ratio’s as well.  If the ratios work, get ready to pay these off. 

    You may want to work hand in hand with you banker(s) on this to make sure they are on board and agree with your analysis - before you start paying down debt.  But once you think you have a solid plan, consider:

    a.  Getting a residential loan to refinance as much as your personal debt as possible. (They are cheaper and easier to get)
    b.  Getting another unsecured loan that has a lower rate/payment and transferring the balance.
    c.  Bring on a partner, relative, friend to pay these off for you for a stake in your business or as a personal loan.
    d.  Ideally use your own cash, to pay them off.
  2. If you have a substantial amount of equity in your property, ie if you are below 50% loan to value, consider a hard money loan.  These are expensive options and hard to qualify for, but they have no Use of Proceeds or the ratio issues discussed above.  This is often a solid solution to refinancing personal credit card debt. 
  3. Considering using a factoring loan or credit card based type factoring loan.
  4. Keep looking for a more aggressive bank and or one that does not simply double personal expenses.  Some banks do use a different ratio and or will use a set amount.  For example, some lenders will just add a flat $20,000 on top of your personal annual payments.  This can often make the numbers work.   
  5. Make sure that the your personal or business expenses are not being double reported.  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 of the more lenient underwriting calculations mentioned) and definitely only counted once!  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.  
Start making the switch now to put as much of your debt into your businesses name as possible.  For example, you could have private notes be rewritten (consult with an attorney on this) to include your business name or transfer balances on credit cards.  It might not help a lot now in terms of your actual payments, but in the future, you will be in a much better position to refinance the debt and get the loan you need. 




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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