Personal cash flow as a source of repayment for commercial real estate loans or business loans.

From time to time, probably one out of every thirty requests when dealing with small business loans or income producing property loans, I will come across a loan package that has personal cash flow of borrowers or supplemented by the personal cash flow of borrowers as the source of repayment.

This situation arises when the business income is not enough to service the proposed debt and has to rely on the income of the guarantors to supplement the debt coverage. It can also happen when the rental income is not enough as in the case where a building has too many vacancies or is going through renovations

Although I am a bit hesitant of calling the usage of this type of source of repayment a trick, there is something not completely right from the point of view of credit when you have to consider another stream of revenue as the source of repayment for a project / venture / business / commercial real estate. If you look at this from the point of view of a credit analyst, your first question should be : Why isn’t this project able to repay the debt by itself?

Being that your primary function as an analyst is to asses the repayment capability of the borrower and safeguard the quality of the credits given by your employer, having your borrower rely on something other than the cash produced from operations is something that is naturally worrisome. I am not saying that such an arrangement is not something that can’t be worked into the structure of a loan. In fact, It is something that you might want to keep in mind if your request is a bit short in repayment.

The following is an example of a personal cash flow that I found in some old credit analysis.

Although the technique to arrive at a net personal cash flow might differ from Bank to Bank, this example will give you an idea on the general way the personal cash flow is calculated.

Personal Cash Flow

YEAR	1996
Wages, Salaries, Tips ( US$)	225,000
Less
Federal Tax Withheld	43,976
Estimated Tax Payments	0
Federal Tax Owed	6,908
Net Wages and Salaries	174,116
Interest Income	5,172
Ordinary Dividends	508
IRA/KEOGH	0
Other Income (Foreign)	0
Net Other Personal Income	5,680
Business Income	0
Net Business Income	0
Capital Gain	(3,000)
Net Capital Gain	(3,000)
Rental R/E, Royalties, Partnership, S Corps.	(1,353)
Net Rental R/E, Royalties, Partnership, S Corps.	(1,353)
Personal Cash Flow	175,443
Less
Personal Living Expenses (20%)	35,089
Annualized Installment loans¹	24,396
Property Taxes	7,773
Gifts to Charity	1,790
Sub-total	69,048
Net Personal Cash Flow	106,395

¹ From CBI Report dated 2/6/1996 includes mortgage payments.