I am a small business owner with no real long term debt (just a small lease)..most of if not all my debt is carried on lines of credit and credit cards. I want to approach my bank to term out or refinance my line of credit and or credit card debt into amortized term debt that can be paid down over time. I have done some research and am trying to calculate my ability to cash flow for a loan. I have the income part figured out and have the "new/ requested" loan figured out for cash flow purposes but how do I account for the remaining debt that will still be carried on say my credit cards???

”….how do I account for the remaining debt that will still be carried on say my credit cards???….”

Well it depends on the lender. Lets talk about lines of credit because most of them are due only at maturity. Credit cards carry a small principal repayment portion every month.

- Most small business lenders will consider the outstanding and consider it to be amortizable over a short period of time. We are talking at most 36 months. This means that if your business owes $36,000 in revolving debt, they will assume about $1,000 of your monthly cash flow going to pay down this debt.

- Others will consider all of that debt payable within the year. This is probably the most stringent scenario.

- Another option is to consider only the interest expense on a fully utilized line “even if it is not being used” as the debt service. This is more common in larger sized corporate deals.

Depending on the size and complexity of a loan, I will sometimes make the assumption that the credit cards and line of credit are maxed out and are repaid at a minimum of interest and 5% principal due each month. I also tend to take lease payments and use six months of payments as the amount due (assuming that if the company terminates the lease prior to maturity than they will be on the hook for half a year of payments).

That being said, these are not hard and fast rules and I will often do one, both, none, etc. In the end it all depends on the level of risk that I am taking.

Follow up Q for Rick & Admin:

have you seen or heard of lenders willing to refi or give a lines of credit to an existing business ask for a reduction of any unused/open lines of credit? any idea on what ratios are taken into account to determine that?

I have had clients that have high revolving debts with additional open lines of credit which we ask to be reduced for DTI purposes. Wondering if same logic is usually applied to business lines of credit.