What is a business debt schedule, and how do you build one?

What a debt schedule is, and what it is not

A debt schedule is a snapshot of everything the business owes to lenders and financing companies on a given date, laid out so a credit officer can read the whole picture on one page. It is not the amortization table for a single loan, which shows one loan's payments over time, and it is not the liabilities section of the balance sheet, which lumps debts together and often leaves some out.

It appears on every one of Midas Partners's lender checklists. For a term loan it is the debt schedule; for a line of credit or asset-based loan it is the debt schedule with the UCC position, meaning the existing liens on the assets. A lender reads it for three things: how much the business pays each year to service debt, who already has a claim on the collateral, and what the new loan will replace.

The columns lenders expect

The purpose column looks like a formality and is not. Lenders look harder at debt that paid for losses or distributions than at debt that bought equipment or another business, and in a refinancing or recapitalization the purpose tells the new lender what its money is really replacing. Every line should be something management can explain if asked.

A worked example

The schedule below is for a hypothetical distribution company that made one acquisition a few years ago, in plain numbers (thousands), on the same date as its balance sheet.

Two things stand out to a lender reading it. First, the seller note is being paid, so its payments count in debt service, and any new senior lender will want it subordinated on its own terms or paid off at closing; see subordination agreements. Second, the revolver and the term loan share a lien on all assets, so every row that is not being refinanced has to fit inside the new lender's permitted debt and liens. See blanket liens.

Tying the schedule to the balance sheet

A lender's first test is whether the schedule's total agrees with the debt on the balance sheet at the same date. In the example, the balance sheet shows notes payable of 6,500 and a shareholder loan of 500, a total of 7,000. The schedule shows 7,520. The difference of 520 is the equipment lease: the payments were booked as rent, so the obligation never appeared as a liability. That is common, and it is exactly the kind of gap a credit officer will find in the bank statements if the schedule does not explain it first.

• Match the dates. Use balances on the balance sheet date, not today's balances against a year-old balance sheet.
• Split current and long-term. The principal due in the next twelve months should agree with the current portion of long-term debt on the balance sheet.
• Check the interest. Divide the year's interest expense on the P&L by the average debt. If the result is far above what the loans on the schedule carry, something is missing; if it is far below, a lease or a note may be booked somewhere else.
• Check the bank debits. Every recurring payment to a lender, lessor or note holder in the bank statements should map to a row.
• Check the liens. A UCC search lists every secured creditor that has filed against the business. Each filing should map to a row, or be terminated. See UCC-1 financing statements.

Why coverage depends on it

The debt service coverage ratio divides the cash flow available for debt service by the annual payments, and the annual payments come from the schedule. Conventional bank lenders commonly look for at least 1.25x. A schedule that leaves out a payment overstates coverage, and the lender's own recalculation will undo it.

In the example, with cash flow available for debt service of 2,900, coverage on the full schedule is about 1.7 times. Leave the lease off and the same arithmetic gives about 1.9 times, until the lender finds the monthly debits. The honest number is the one the loan will be sized on either way.

Lenders also apply their own conventions to certain rows:

• Lines of credit: some lenders count only the interest; others impute a repayment of the drawn balance over a set period, which raises debt service.
• Equipment leases: lease payments are usually included as debt service or as a fixed charge; see DSCR vs FCCR.
• Owner loans: with no scheduled payment, they are often left out of debt service if they are subordinated to the new lender; see how lenders treat owner loans.
• Seller notes: counted at their scheduled payments; a note on full standby, receiving no principal or interest, carries no debt service while it stays that way.

What a refinance needs from it

In a refinance, the schedule becomes the payoff list. Each row is marked as paid off at closing or surviving, and the payoffs, any prepayment premiums and the closing costs together become the uses of the new loan in the sources and uses. The surviving rows, plus the new loan's payment, become the debt service the new lender tests. A payoff letter will be needed for every row being paid off.

The schedule also shows what the new lender will need settled. Every lien being paid off needs a release at closing; every debt that survives, usually a subordinated seller note or a small equipment financing, has to fit the new agreement's permitted debt and lien baskets; and any loan with call protection adds its premium to the cost of the refinance. The refinance-specific version of this page is preparing a debt schedule for a refinance.

Build the schedule before choosing the loan. Which debts survive, and what the payments add up to, often decide which structure the company should be asking for.

Where the schedule goes

The debt schedule is the starting point for the financing model: the sources and uses, the payoff list and the coverage and leverage tests are all built from it, and the lender presentation and underwriting memo repeat the same figures. That is why it has to tie to the balance sheet before anything else is built. In Midas Partners's lender package it is one of the documents the package is built from, in a day once the documents are in, and a senior banker checks every page before the client approves it.