A Lender will also typically utilize the traditional cash flow figure as its basis in evaluating a business’ ability to make annual debt payments. Lenders quantify the business’ ability through the use of the debt service coverage ratio. This ratio is defined as follows:

The annual debt payment figure is the sum of all annual debt obligations the business will have at or around the time the commercial mortgage will close. For example, a business currently has a line of credit and equipment financing and is planning on buying a property to locate its office and some new equipment. A lender would determine the annual debt payment figure by summing the:

Generally, lenders have a required minimum debt service coverage ratio that may range from a low of 1.0:1.0 to as high as 1.5:1.0. It should also be noted that in the case of a substantial change in business, such as an expansion or a start up business, debt service coverage ratio requirements may be different and a lender may also consider projected cash flow in its calculation of debt service coverage ratio. In these cases, cash flow from other sources, such as another business you own outside of the project being financed, may also be used as additional support for the calculation of debt service coverage ratio.

As previously mentioned, some lenders also calculate actual cash flow. These lenders alternatively utilize a business’ actual cash flow figure to calculate debt service coverage ratio. Other lenders may compare a business’ actual cash flow figure to its traditional cash flow figure to determine if the two closely correlate. If the two are not closely correlated, additional adjustments may be made to traditional cash flow to more accurately calculate debt service coverage ratio.