When we issue a line of credit, we currently show the company's ability to cover the debt service by the following assumptions: The line is fully drawn, and then converted to a 15 year amortization with the rate increased 2%, and that principal and interest are due monthly. This "shocks" the line to show that the company can pay down principal, and that the line will not be fully drawn upon and then become "evergreen". Is this too much of a penalty on debt service? I feel as if we only calculated interest only payments, that we are being too lenient. What do other banks do? Are we too conservative?

Too lenient for our bank's blood; we would not do a 15 year loan for working capital purposes. Business lines of credit are typically for working capital and extending the line in full makes the bank an equity partner in the business, not a lender. Since we don't get compensated as an equity partner, we don't lend like one. Now, that is the lender's statement, you would get a distinctly different statement from one of our loan review folks. That being said, I applaud your bank for completing this analysis to begin with (many banks won't).

We changed how we look at cash flows, mostly because in the beginning we really didn't look at cash flows (let alone a "global" cash flow). We simply stated "net income for the past year was $XXX, and interest due for the next year would be $X, yielding a DSCR of XX:XX. Never really showed anything, or really calculated anything.

Now, we show (with this new formula) that debt service would be say $15M (because of the amortization "shock" and rate "shock") instead of the actual amount of $7M (interest only).

Thank you for your comments. I'm glad our analysis is worth something!