Business Financing

photo credit: World Economic Forum

Calculating global income on commercial loans is all about figuring out the borrower’s TOTAL net income. In other words, underwriters want to know all of the borrowers sources of income and all of their expenses on all business, rentals, and personally. What they are trying to get at is does the borrower cash flow over all.

It’s not uncommon for a borrower to have a few entities that are making money and a few that are not. Likewise, it’s common to see that overall the borrowers expenses exceed what they make through all of their sources of income. In this example no lender in their right mind will extend credit to a borrower that is underwater.

Perhaps an example will help. Say you’re working on a commercial refinance. It’s an owner occupied. Loan amount is $1,000,000 and you think you can get it done at 6.5% on a 25 year amortization schedule. This borrower has only the business and his personal income and expenses with no investment property. After reviewing the business tax returns and adding back depreciation, interest, amortization, etc you see you have say $150,000 in net income that can be used to service the proposed loan.

Also the borrower pays himself $100,000 a year as W-2 income. After checking his credit report you see that his monthly bills are $4,500. Per the banks underwriting guidelines they double the personal expenses to make sure he has enough personal income to cover all his debt. So that’s $4,500 x 2 x 12 months equals $108,000. According to underwriting he’s $8,000 short per year in personal income and this amount is subtracted out of the $150,000 of net business income. So his global net income is $142,000. Obviously this is a very simple example and does go into all the items that can be added back on that are reported twice but it should give you the idea.

To figure out if the loan cash flows divide the global net income ($142,000) by the annual proposed debt service. $1,000,000 loan amount with a 6.5% rate, on a 25 year amortization schedule equals a monthly payment of $6,752 or annually at $81,024. Dividing $81,024 of debt service by $142,000 of global net income which reveals a debt coverage ratio of 1.75, which is a very strong deal. Most banks minimum is a normally a 1.2. That’s basically how you calculate Global Net Income.

Jeff Rauth is President of Commercial Finance Advisors, Inc. He has a commercial broker “store” at his website. Check it out. Everything you need to broker loans, agreement, books, spreadsheets, etc. commercial loan broker training or become a commercial loan broker .