What is a business debt schedule and how do I prepare one for a refinance?

Why a refinance starts with this document

A new lender in a refinance is buying out other lenders. Before it can say how large its loan should be, it needs to know exactly what is being bought out, what will remain, and what the business will pay each year once the refinance closes. The debt schedule answers all three. That is why it is often the first document a credit officer opens, before the P&L.

It drives the sizing directly:

• The payoff side. Every debt marked for refinance, at its balance, becomes a use of the new loan's proceeds. At closing the balance is replaced by a figure from a payoff letter, but the schedule is where the estimate starts.
• The surviving side. Debts that are not being refinanced keep their payments, and those payments sit beside the new loan's payment in the debt service coverage test.
• The leverage side. The total of funded debt after closing, against EBITDA, is the leverage ratio the new lender sizes to and, usually, a covenant it will test every quarter. See senior vs total leverage.
• The lien side. The collateral column tells the lender which liens have to be released for it to take the position it requires, and which creditors it will share collateral with afterward.

An error on the schedule is an error in all four, and in a recapitalization it is also an error in how much can be paid out to the owners. A missing debt means an understated payoff, an overstated coverage ratio and a lien nobody planned to release.

The columns a lender expects

Two columns cause the most trouble. Payment should be stated at its real frequency, not converted: a note paid quarterly or a lease paid weekly should say so, and the lender will annualize it. Prepayment terms are often left blank because the owner has never read that part of the note; a penalty discovered after the term sheet is signed comes straight out of the refinance's benefit. See how prepayment penalties work.

Tying the schedule to the balance sheet

The single most important check is that the schedule and the balance sheet say the same thing. Lenders test it by adding up the schedule and comparing it with every debt line on the balance sheet at the same date. If the totals differ, one of the documents is wrong, and until someone explains the difference the lender cannot trust either.

A difference is not a problem. An unexplained difference is. The reconciliation above tells the lender the schedule is complete and the balance sheet is incomplete in ways the owner understands, which is far better than two documents that happen to agree because both leave out the same debts.

Date matters too. The schedule should be dated to the same month-end as the balance sheet it ties to, and updated to a later date only alongside a later balance sheet. A schedule dated today beside a balance sheet from year-end will not tie, and the lender will spend time finding out why.

The debts owners leave off

Almost every incomplete schedule is incomplete in the same places. These are the obligations that do not look like bank loans, so owners do not think of them as debt:

• Insurance premium financing. A finance agreement for the annual insurance premium is a loan with monthly payments, often booked as a prepaid expense. It is short, but it is debt and it is a fixed charge.
• Equipment leases and financing agreements. A lease with a nominal buyout is debt in substance. Even a true rental commitment is a fixed charge the lender will count.
• Loans from owners and related parties. They may be subordinated or forgiven in the refinance, but they must be shown. See how lenders treat owner loans.
• Earnouts and deferred purchase price from an earlier acquisition. They may not be debt on the balance sheet, but a lender will count them against cash flow and want to know when they fall due.
• Seller notes from an earlier acquisition, with their subordination or standby terms. See refinancing seller notes.
• Tax installment agreements. A payment plan with a taxing authority can carry a lien that ranks ahead of the new lender, and the lender must know about it.
• Vehicle loans in the business's name, and loans in an owner's name that the business pays.
• Guarantees the business has given for an affiliate's debt, listed separately as contingent obligations.

If the business makes a regular payment on it, or someone could call it, it belongs on the schedule.

From schedule to refinance plan

Once the schedule is complete, add one more column: refinance or keep. That turns a list into a plan, and it is how a lender reads the file.

• Refinance the expensive, short and awkward debts: short amortizations, balloons coming due, seller notes that block the new lender's terms, variable-rate debt the business would rather fix.
• Keep the debts that are cheap, long and well matched to their assets, unless the new lender requires their collateral.
• Resolve owner loans and related-party debt: subordinate them to the new lender, convert them to equity, or explain their repayment.
• Check each debt marked for refinance against its prepayment terms and the consent it needs to be repaid.

The totals then give the lender what it needs in one view: the sum to be paid off, the debt service that survives, and the new loan's payment. Earnings against that total is the coverage test; conventional bank lenders commonly look for debt service coverage of at least 1.25x. Whether the whole exercise pays for itself is a separate question, covered in the refinance break-even.

How Midas Partners handles the schedule

The debt schedule is on every one of Midas Partners's lender checklists, for term loans and for lines of credit alike, because it is where every refinance and recapitalization starts. It should come with copies of the notes being refinanced, and it should reconcile to the balance sheet before any lender sees it, so the gaps above are found before a credit officer finds them. Senior bankers run every Midas Partners engagement; software does the analyst work and a senior banker checks every page before the client approves it.

Once the documents are in, Midas Partners builds the full lender package — financing model, lender presentation, blind teaser and underwriting memo — in a day, and the schedule feeds the model's sources and uses and its coverage tests directly. Midas Partners agrees its fee with the client in writing before anything goes to a lender. See the package.