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Global Analysis: Consolidate Balance Sheets?

Many business lenders use global analysis to consolidate cashflow among related entities. For example, if a small business has one 80% owner and another 20% owner, it is likely you’ll consider the cashflow of the business combined with the cashflow of the 80% owner.

After all, if the owner is guaranteeing then his/her personal cashflow from other sources may come into play. And besides, the cashflow they take from their business may be higher or lower than the company can clearly afford.

So what about the balance sheets?

I got this question from one of my AgLending clients last week. In a training on Tax Return Analysis for Agriculture we had used their proprietary software (as is my custom when doing in-house training).

Like many Ag Lenders they look at the consolidated balance sheets as well. The question:
Do you go ahead and consolidate balance sheets with two owners and the farming operation when each owner is only guaranteeing 50%?

They were considering consolidating all three entities at 100%. They were also considering removing 50% of each asset class of the two guarantors, clearly much more work.

My answer is my favorite…’it depends’. My first inclination always is to do it the most simple way if the harder way won’t improve the credit decision.

My questions, her answers, and our solution.

Q: What do you use the consolidated balance sheets for?

A: Current ratio and Debt-to-Assets

Q: Does it look like it will make a difference either way?

A: Not really

Q: What do you think the examiner would think?

A: The examiner happens to be here  and she thinks if we consolidate all three and make a note that the guarantors are each only guaranteeing 50% we’ll be fine.

Less work, good credit decision and happy examiners…

It doesn’t get any better than that!

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.