How to Calculate Global DCR

Christine’s question:

When calculating global debt coverage ratio, what is the best way to combine business and guarantor cashflow?

Linda says:

As always with algebra, there are several ways to utilize guarantor and business cashflow in a debt coverage ratio and each gives a different result. Here are the two...

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What’s the significance of a final tax return?

Kimberly’s question:

One of my guarantors was in a now-ended partnership. The final tax return shows a loss, primarily made up of bad debts. What is the significance of this loss, given that the company no longer exists? Should I count it against my borrower?

Previous returns don't show...

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5 Steps to an Effective Loan Write-up

Five Steps to an Effective Loan Write-up

Analysis is useless if it does not include analysis! Okay, that is pretty cryptic. Keep reading, though, and all will become clear. In preparing for a recent training on Farm Balance Sheet Analysis for an AgLending client, the Chief Credit Officer asked for a strong segment on the write-up....

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All about the 8825

Greg's question:

My borrower has a lot of real estate, and his partnership return includes a form 8825. How does the information in that form flow up to the top of the return, especially as regards depreciation?

Linda says:

The 8825 is the real estate form and it flows to...

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How to judge the asset increase on the 1065

Jacqueline’s question:

The Buildings and other Depreciable Assets figure on the borrower’s 1065 Balance Sheet increased significantly from one year to the next. What part of the return will help me determine the reason for the increase or is this the type of question I must always ask the borrower?

Linda says:

Even though the tax return does not have to include a full equipment list, here are some options to either figure out for yourself what they are buying or have a more targeted conversation with your borrower.

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3 ways shareholders fail to limit their liability

Guarantee a Loan

The reason small to mid-size business owners often incorporate is to limit liability but one way they can lose that is to guarantee debt.

Maybe that is not a failure because they did it on purpose but they certainly need to understand that at least for that loan or that contract they are now openly liable personally for that obligation.

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How does Treasury Stock impact cashflow?

Dawn’s question:

What information is disclosed on the 1120S, Schedule L, line 26, “cost of treasury stock”? Is this ever relevant to the lending process?

Linda says:

Treasury stock means stock that had been issued and was bought back by the company. So it will always be blank unless they bought their own stock back from shareholders at some point.

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Does it matter if Sch C/F is filed by sole prop or one-owner LLC?

Well, I think so and here is why.

Downside of a sole proprietorship

If a Schedule C is filed by a sole proprietor, what we know is that sole proprietor has unlimited liability with regards to that entity. Anything that goes wrong can come back against them and their personal net worth or any other activities they are involved in.

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Subtracting Taxes – What’s Most Accurate?

Andrew’s question:

I have a question regarding tax payment on the personal tax returns. When we’re analyzing financials, we typically use line 61 (total tax) to deduct taxes. I’ve heard from analysts from other financial institutions that they use line 72 (total payments) when deducting taxes. I’m trying to understand what the difference would be in terms of cash flow outcome.

Linda says:

Andrew, there are issues with subtracting federal taxes and with subtracting state taxes. Some lenders do neither because they use a debt-to-income ratio that assumes before-tax numbers. But if you need to subtract federal taxes, neither line 61 nor line 72 are perfect, Andrew. Here is my pick…

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1065: Negative basis, Capital Gains and Cashflow

Mike’s question:

I have a borrower who derives a large percentage of her cash flow from capital gains. She shows a $404M capital gain from sale of ownership in an entity. On the k-1 the entity shows a negative capital account of (309M). It seems to me that the cash gain is probably only $95M since $309 of the gain was netting out her capital account to 0. Is this correct or should I give her all of the $404M gain as cash flow?

Linda says:

It can be difficult tell the cash impact of amounts reported on the K-1. It depends, in part, on whether the k-1 is on the tax-basis or FMV basis. And when all is said and done, if it is significant, you may need to ask for the sale agreement. Here is the scoop…

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