Cash flow For owners who want to see their numbers the way a lender does
How lenders figure your business's cash flow.
A lender doesn't go by your sales or your bank balance. It starts with the profit on your tax return, adds back what didn't cost cash, then adds the owners in. Here's each step, and where to find each number on your return.
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The business's side
From net income to cash flow.
Accountants would call the first three steps EBITDA. Lenders go two steps further, because the owners are part of the loan too.
- 1
Start with net income
The bottom line of the business's tax return, the profit it reported to the IRS. For a C corporation, that's taxable income less the corporation's own tax.
- 2
Add back interest
The loan payments the cash flow is tested against already include interest, so it isn't taken off twice.
- 3
Add back depreciation and amortization
Both are expenses on the return, but no cash goes out the year they're taken. Lenders do set some aside for upkeep, as you'll see further down.
- 4
Add back pay to owners who'll guarantee
An owner's salary is an expense to the business but income to the owner, and owners of 20% or more are tested alongside the business. So their pay is added back here, and their taxes and living costs come off on their side. Pay to anyone who won't guarantee the loan stays an expense.
- 5
Take out what the owners took out
Distributions are cash that left the business, so they come off its cash flow and count as the owners' income instead. Each dollar is counted once.
Lenders don't count income that won't come again, like an insurance payout or a gain on selling equipment. They can add back a one-time expense when records show it won't recur. Expect questions about any large lump-sum line.
Where to find each number
The lines on your business's tax return.
| Number | Form 1120-S | Form 1065 | Form 1120 | Schedule C |
|---|---|---|---|---|
| Net income | Line 22 | Line 23 | Line 28, less total tax on line 31 | Line 31 |
| Interest | Line 13 | Line 15 | Line 18 | Lines 16a and 16b |
| Depreciation | Line 14 | Line 16c | Line 20 | Line 13 |
| Amortization | Form 4562, line 44 | Form 4562, line 44 | Form 4562, line 44 | Part V, or Form 4562, line 44 |
| Owners' pay | Line 7 | Line 10 | Line 12 | Not on Schedule C |
| Distributions | Schedule K, line 16d | Schedule K, line 19a | Schedule M-2, line 5a | Not on Schedule C |
These are the lines on 2023 to 2025 returns. On 2022 returns, net income is line 21 on Form 1120-S and line 22 on Form 1065. If some depreciation is in cost of goods sold, use the total on Form 4562, line 22. Count owners' pay only for owners who'll guarantee the loan: Form 1125-E lists each officer's pay, and box 4c of each partner's K-1 their guaranteed payments. A sole owner's Schedule C profit is already theirs, so there's no pay or distributions to add.
Rather not upload your returns? The check lets you type in just these lines, and shows where each one is on that year's form.
The owners' side
Then each owner of 20% or more.
Owners of 20% or more usually guarantee the loan, so lenders add each one's own cash flow, from their personal tax return and personal financial statement. That combined figure is called global cash flow.
What counts
- Wages from other jobs, interest, dividends, pensions and Social Security.
- Rental income from Schedule E, with its depreciation and mortgage interest added back.
- Profit from other businesses the owner has.
- Distributions from this business.
What isn't counted again
- Wages from this business, already added back on the business's side.
- The owner's share of this business's profit on their K-1, already counted in its cash flow.
What comes off
- Total federal tax from Form 1040, line 24, which includes self-employment tax, and state income tax.
- An allowance for living costs: 25% of the first $100,000 of the owner's income and distributions, and 15% of the rest. That income runs from wages and interest to pensions and rentals, and a loss doesn't lower it.
Cautious lenders count distributions in that income, as the check does, which can raise the living allowance a lot. Some leave them out. When large distributions make the difference, your results show coverage both ways.
Global debt service coverage
Global cash flow over every loan payment.
The business's cash flow plus each owner's, divided by a full year of payments on every loan: the business's loans, leases and lines of credit, the new loan, and each owner's mortgage, car loans and other personal debts, all from the debt schedule and personal financial statement. Leave out any loan the new one pays off.
That's the global debt service coverage ratio. Most lenders want at least 1.25x on a conventional loan. SBA's minimum is 1.15x, or 1.25x for a 7(a) that buys a business or a co-owner's share.
See it with numbers
A made-up bakery's cash flow and coverage, worked through line by line, with a calculator for yours.
Maintenance and repairs (MCAPEX)
Coverage after maintenance and repairs.
Depreciation is added back, but equipment still wears out and has to be replaced. So many lenders set aside a yearly amount for maintenance and repairs, called MCAPEX, and test the payments again after taking it off.
The check estimates it from two years of depreciation, leaving out depreciation on buildings, divided by two. It tests both years after the set-aside, and if either falls short of the minimum, the grade is Close.
Two years, and a recent statement
One good year usually isn't enough.
Both years count
Most lenders want two years of returns that each cover the payments. An earlier year below the minimum needs an explanation, and a long relationship with the bank can help.
Statements no more than 90 days old
If your last tax year ended a while ago, lenders want a profit and loss and balance sheet dated within 90 days.
A year not filed yet
The check can use the year-end profit and loss for a year whose return isn't filed, and grades it Close at best until the return is filed.
What a lender will ask
The numbers that draw questions.
- What's in Other income, and will it happen again?
- Why did sales drop 10% or more?
- Why was there a loss, and has it turned around?
- Why were distributions larger than the year's earnings?
- Why was depreciation so much higher in one year?
The check asks these when your numbers call for them, so your answers are ready before you apply. It doesn't check your credit or know a particular lender's own policy, so treat your results as a well-informed estimate, not an approval.
Choosing an SBA loan?
SBA 7(a) and 504 side by side, with a $1 million building bought three ways.
See your cash flow the way a lender will.
The check reads two years of returns, adds the owners in, and shows your coverage and what to fix first.
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