The daily debit as a share of your daily deposits

The ratio the funder runs

Take the average of your bank deposits over the last three to six months, divide by the number of banking days, and compare the proposed debit to that. It is a crude measure and it is the one that gets used, because deposits are the only figure a funder can verify from statements alone.

Illustrative only — $90,000 of monthly deposits across 22 banking days is $4,090.91 a day.

• A $450 daily debit is 11.0% of average daily deposits, and $9,900 a month.
• A $750 daily debit is 18.3%, and $16,500 a month.
• A $1,200 daily debit is 29.3%, and $26,400 a month.

Those percentages tell you what fraction of the top line is committed before you have paid for anything. They tell you nothing at all about whether you can afford it.

The ratio you should run

Deposits are not margin. Run the debit against the cash the deposits actually leave behind.

Continue the illustration with a 35% gross margin and $22,000 of monthly fixed costs. Gross profit is $31,500. After fixed costs, free cash is $9,500 a month, which across 22 banking days is $431.82 a day.

That is the real line. A debit of $431.82 a day consumes every dollar of free cash. The $450 debit that looked like a modest 11% of deposits is already over it. The $750 debit takes $16,500 out of a business generating $9,500 — a $7,000 monthly hole — while a funder's spreadsheet records it as 18.3% and unremarkable.

Two businesses with identical deposits and different margins have completely different capacity, and only one of them is visible in the bank statements.

Where the danger line actually sits

There is no universal percentage, and anyone quoting you one is quoting a rule of thumb from their own book, not a fact about your business. The line is computable, though, and it is specific to you:

Maximum sustainable debit per banking day = (gross profit − fixed costs − existing debt service − owner's draw) / banking days in the month.

Compute it from the worst three months of the last twelve, not the average, because the debit does not shrink in a bad month unless the contract says it does. Then leave a margin under it, because the calculation assumes nothing goes wrong.

The month-length problem

Debit schedules run on banking days, and months do not contain the same number of them. At $495 a day, a 19-day month takes $9,405 and a 23-day month takes $11,385 — a swing of $1,980 that arrives without warning and without a line item.

Payroll, rent and insurance are monthly. The debit is not. Businesses that budget the debit as a monthly figure are short in exactly the months that contain an extra debit day, and those months are not the ones you would predict.

Count the banking days in each of your next four months before you sign anything with a daily schedule.

What happens when deposits fall

If your contract has a genuine reconciliation right, the remittance is adjusted downward when revenue falls and the term extends. If it does not, the debit is fixed and a 20% fall in revenue means the debit's share of your deposits rises by a quarter.

Run the arithmetic on the bad case before you sign, not after. Take your worst month in the last two years, apply the fixed debit to it, and see what is left. If the answer is negative, you now know the exact revenue level at which the facility stops working, and you can watch for it.

Seasonality breaks the average

A three-to-six-month lookback produces an average, and a seasonal business does not live at its average.

Across a 21-day month that is $16,380. In August it is 11.3% of deposits and nobody notices. In January it is 34.1% of deposits, taken out of the months carrying the least margin and the same fixed costs.

If you have a season, the lookback window matters more than the ratio does. Ask which months were used. Then run the debit against your worst three months, and treat any product without a working reconciliation right as though the trough number is the real one — because it is.

Two accounts, one debit

If the business runs more than one bank account, check which account the debit is authorised against and how that account gets funded.

Two failure patterns recur. The first is a debit hitting an account that only receives transfers, so the daily obligation depends on somebody making a transfer every morning. One missed transfer is a returned item, and returned items are enumerated default events in most of these agreements. The second is an underwriter sizing the debit off deposits in one account while the costs leave another, which produces a debit that looks affordable against the wrong half of the business.

Fund the debit from the account that receives the revenue. Keep a buffer in it sized to several days of debits. And disclose the second account up front rather than letting it surface at renewal, because a deposit pattern that only makes sense once both accounts are visible looks like something else when only one is.

A short checklist

1. Average daily deposits, from statements, over at least three months.
2. Proposed debit as a percentage of that. This is the funder's test.
3. Free cash per banking day, after cost of sales, fixed costs, existing debt service and draws. This is your test.
4. Debit as a percentage of free cash. Above 100%, the deal funds itself out of your payables.
5. Banking-day count for each of the next four months, multiplied by the debit.
6. The same arithmetic on your worst historical month.

The calculators will run the payment side. The margin side has to come from your own books, and the whole point of the exercise is that the funder cannot see it.