Several times a year, bankers ask us for a debt schedule on behalf of our mutual clients. Typically, it is created either at renewal for existing debt, or when a business is seeking new financing. As indicated by the opening sentence, this is a common request and a schedule that any prudent business owner would probably want to keep updated regardless of the banking need: it is just that helpful!
What is a debt schedule?
Simply put, a debt schedule details out all the debt a business has outstanding or available. It supplements the financials because it includes items that might not be on the Balance Sheet but, nonetheless, are valid debts that a bank would like to be aware of. Examples include lines of credit with a zero balance or equipment financing plans that might not be fully drawn.
What should a debt schedule include?
A good debt schedule lists much more information than is present on the financials, enabling a creditor (typically bank underwriter) to evaluate the credit risk the bank client represents. It should be no secret or surprise that the more debt a company has relative to its size, the higher the risk it poses to a subsequent lender. Unlike the balance sheet, which generally only shows loan balance (and nothing for leases), a debt schedule includes some or all of the following:
- Creditor/lender
- Original amount of debt
- Current balance
- Interest rate
- Monthly payment
- Start date
- Maturity date
- Collateral
- Account number
- Term
Note that a debt schedule may list more than the debts of one company. Typically, it includes all business loans, leases, and debts owed or guaranteed by the significant owners of the company. For example, if a two-owner company had a mortgage on their shop owned by a separate LLC, the mortgage would be on the same debt schedule as the operating company’s loans. But we would not include the owners’ personal mortgage or personal car loans. If they then purchased an investment property jointly, we would add any loan related to that purchase to the debt schedule.
How should a debt schedule be organized?
It is best practice to group the entries on the debt schedules by collateral, then sort them within each group by maturity date (first to mature at the top). For example, there might be a group for Equipment, Vehicles, Trailers, Leases, Lines of Credit, and Mortgages. If your business has a PPP loan, it should be included on the debt schedule as well. Include it under Lines of Credit rather than dedicating a whole category to one line-item. Similarly, if a retail business has a floor plan account(s) secured by inventory this could be in the Line of Credit section as well. Click here to see a sample loan schedule.
How often should you update a debt schedule?
Periodically, it is good practice to update the debt schedule to reflect the most current activity and balances. Most likely, some loans were paid off and others were added. Certainly, the balances have changed.
Most lenders will accept a debt schedule if it has been updated within the past 6 months. For that reason, I recommend updating them twice a year. However, also consider the number of changes since the last update. An acquisition that materially affects the financial condition of the business(es) or guarantor(s) is probably worth an update, before the next bi-annual date. The same reasoning applies to the retirement of a loan that had a relatively high payment, as this could provide cash flow to be factored into a new loan payment.
One tip is to date the schedule the day it was prepared but use a historical date for the loan balances. For example, we might date the debt schedule 3/9/21 (today’s date as of writing) but use 2/28/21 for the loan balances. This practice helps in a couple of ways. First, presumably, the books were closed as of the end of February, so we have reason to believe those numbers are accurate. Second, if proper closing procedures are followed, the balances will not change. Third, and finally, if we used today’s balance it could be different by the end of the day (assuming a loan payment notice was entered today), rendering the debt schedule inaccurate.
We may also hide certain unnecessary columns when providing a debt schedule to a new lender, the interest rate, for example. Why show the bank what interest rate you are paying? You would want lenders to give you their best rate, not just one that is slightly lower than what you already have. And finally, do not feel pressured into using the bank’s standard form. We maintain our client schedules in Excel and have not yet had a lender require us to translate it to their form. Of course, they prefer their form, or occasionally ask us to use it, but we have not yet been forced to use it and our schedule has always been accepted.
Is a debt schedule just used for financing?
While a debt schedule is a necessary tool for financing, it is also a great supplement to standard financial review. It can help business owners to understand their capital structure. A common practice we see is for the owner(s) to add up how much they will save each month based on the upcoming maturities.
Hopefully, these tips will take some of the stress out of receiving this request from your banker.
About the Author
Jeff Heybruck is the founder of Lucrum Consulting and brings more than fifteen years of accounting experience and financial expertise. Jeff holds a Master of Accounting from UNC-Charlotte. You can reach him at [email protected].
Also published on Medium.
