Cash Flow

Everyone has heard that Cash is King and that's never been more true than it is today since companies have less access to credit than they used to. So what's important in analyzing a lease based on cash flow?

By cash flow, we mean cash flow circulating through the business. Cash Flow is one of the 3 primary business financial statements, along with the Income Statement (also known as P&L for profit and loss) and the Balance Sheet. The only exception to this is for startups where there is no cash flow and that cash flow has to come from another income source, other assets or from savings. One of the benefits of strong cash flow is often times, this equates to good business credit, as measured by Paydex, a service provided by Dun and Bradstreet.

In nearly every case we need the previous year's 3 financial statements and sometimes we need 2 years in order to look at trends. Remember, these companies often don't qualify on credit alone so more information is almost always required.

Debt Service Coverage Ratio is the ratio that defines the risk in this type of lease. How much cash flow runs through the business that can be used to service the debt? Most prefer to see a ratio of 2x or 2.0, meaning that the free cash flow covers twice the amount of the lease payment.

By analyzing cash flow of a company where cash flow is strong but credit is weak, we can often use the strength of the cash flow to answer the ultimate question, will they be able to pay this lease back.

Having poor credit makes it tougher but its by no means impossible especially if strong steady solid cash flow is a part of the picture.

Stu
Southern Lending Solutions