What a lender asks about location one when you are funding location two

Expansion files get built backwards. The owner spends three weeks on the new location's projection and twenty minutes pulling the existing location's numbers, then discovers that the credit decision turned almost entirely on the twenty minutes.

The reason is mechanical. A projection is an assertion. Trading history is evidence. When a lender has one of each, the evidence carries the file and the assertion sets the upside.

The coverage test, with and without the new site

Existing debt service is 61,200 a year. The new facility adds 78,300. Total is 139,500.

• Coverage on location one alone: 148,000 divided by 139,500 is 1.06.
• Coverage with the new site at its full projection of 96,000: 1.75.
• Coverage with the projection cut in half, which is what a conservative credit analyst will do: 1.40.

Most lenders want something in the region of 1.20 to 1.25 on a debt service coverage test. At 1.06 excluding the new site, the file is not dead — it is dependent. Everything now rests on how much credibility the projection is given.

Turn that into a number you can defend. To reach 1.25 on combined debt service of 139,500, total cash flow must be 174,375. Location one provides 148,000. The new site has to contribute 26,375 a year — 2,198 a month — which is 27.5 per cent of the projection.

That is a far better sentence to say in a credit meeting than "we project 96,000". You are telling the lender the deal works if the new site delivers just over a quarter of the plan.

What gets pulled from location one

• Twenty-four months of bank statements, not three. Expansion files are underwritten on the longer record, and the second year is where seasonality and trend show up.
• Two or three years of tax returns and interim financials. If the interim numbers and the last filed return tell different stories, the difference is the conversation. See interim financials between tax years.
• A current debt schedule with every obligation, including equipment leases, cards used for business, and any advance against receivables.
• A gross margin trend by month. Flat revenue with declining margin is read as pricing pressure, and pricing pressure at site one is assumed to exist at site two.
• Owner compensation and distributions. Global cash flow analysis nets your personal obligations against business cash. A large distribution that funds a personal mortgage is not available for debt service.
• The lease. Remaining term on location one matters. A lender will not write ten-year money against a location with 26 months left on its lease and no option to extend.

The four questions behind the questions

What to prepare, and in what order

1. Close last month before you apply. Send a package where the balance sheet, the P&L and the statements agree — see a monthly close that keeps you fundable.
2. Compute your own coverage three ways: location one alone, both sites at plan, both sites with the projection halved. Put all three in the package. An underwriter who finds you have already run the pessimistic case reads the optimistic one differently.
3. State the break-even contribution the new site must make for the file to work, and show the arithmetic.
4. Evidence the demand with counts and dates, not adjectives.
5. Bring the management answer with a name and a payroll record.
6. Read your existing loan documents for additional indebtedness, change of control and cross-default clauses before you apply. Borrowing for a second site can breach a covenant on the first one, and a lender finding that out before you do is a bad start.

Refuse to submit a projection you cannot break down into volume, price and cost lines that trace to the existing site's actuals. If the new location's assumed margin is better than the one you achieve today, you will be asked why, and "it is a better location" is not an answer that survives a credit committee.